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BUSINESS ACTIVITY TAX

SIMPLIFICATION ACT OF 2005

HEARING

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

ON

H.R. 1956

SEPTEMBER 27, 2005

Serial No. 109–62

Printed for the use of the Committee on the Judiciary

(

Available via the World Wide Web: http://judiciary.house.gov 

(II)

COMMITTEE ON THE JUDICIARY 

F. JAMES SENSENBRENNER, JR., Wisconsin, Chairman 

HENRY J. HYDE, Illinois 

HOWARD COBLE, North Carolina 

LAMAR SMITH, Texas 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

STEVE CHABOT, Ohio 

DANIEL E. LUNGREN, California 

WILLIAM L. JENKINS, Tennessee 

CHRIS CANNON, Utah 

SPENCER BACHUS, Alabama 

BOB INGLIS, South Carolina 

JOHN N. HOSTETTLER, Indiana 

MARK GREEN, Wisconsin 

RIC KELLER, Florida 

DARRELL ISSA, California 

JEFF FLAKE, Arizona 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TOM FEENEY, Florida 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

MARTIN T. MEEHAN, Massachusetts 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

LINDA T. SA ́ NCHEZ, California 

CHRIS VAN HOLLEN, Maryland 

DEBBIE WASSERMAN SCHULTZ, Florida

PHILIP G. KIKO, Chief of Staff-General Counsel 

PERRY H. APELBAUM, Minority Chief Counsel 

SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

CHRIS CANNON, Utah Chairman

HOWARD COBLE, North Carolina 

TRENT FRANKS, Arizona 

STEVE CHABOT, Ohio 

MARK GREEN, Wisconsin 

RANDY J. FORBES, Virginia 

LOUIE GOHMERT, Texas 

MELVIN L. WATT, North Carolina 

WILLIAM D. DELAHUNT, Massachusetts 

CHRIS VAN HOLLEN, Maryland 

JERROLD NADLER, New York 

DEBBIE WASSERMAN SCHULTZ, Florida

RAYMOND V. SMIETANKA, Chief Counsel 

SUSAN A. JENSEN, Counsel 

JAMES DALEY, Full Committee Counsel 

BRENDA HANKINS, Counsel 

STEPHANIE MOORE, Minority Counsel 

(III)

C O N T E N T S 

SEPTEMBER 27, 2005

OPENING STATEMENT 

Page 

The Honorable Steve Chabot, a Representative in Congress from the State 

of Ohio, and acting Chairman and Member, Subcommittee on Commercial 

and Administrative Law ...................................................................................... 1

The Honorable William D. Delahunt, a Representative in Congress from 

the State of Massachusetts, and Member, Subcommittee on Commercial 

and Administrative Law ...................................................................................... 3

The Honorable Howard Coble, a Representative in Congress from the State 

of North Carolina, and Member, Subcommittee on Commercial and Administrative Law ........................................................................................................ 4

The Honorable Bob Goodlatte, a Representative in Congress from the State 

of Virginia, and Member, Committee on the Judiciary .................................... 4

WITNESSES 

Mr. Carey J. ‘‘Bo’’ Horne, President, ProHelp Systems, Inc. 

Oral Testimony ..................................................................................................... 8

Prepared Statement ............................................................................................. 9

Mr. Earl Ehrhart, State Representative, Georgia House of Representatives, 

36th District, National Chairman of the American Legislative Exchange 

Council 

Oral Testimony ..................................................................................................... 13

Prepared Statement ............................................................................................. 15

Ms. Joan Wagnon, Secretary of Revenue, State of Kansas, and Chair, 

Multistate Tax Commission 

Oral Testimony ..................................................................................................... 20

Prepared Statement ............................................................................................. 21

Mr. Lyndon D. Williams, Tax Counsel, Citigroup Corp. 

Oral Testimony ..................................................................................................... 25

Prepared Statement ............................................................................................. 26

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Response to Post-Hearing Questions from Carey J. ‘‘Bo’’ Horne, President, 

ProHelp Systems, Inc. .......................................................................................... 44

Supporting Comments for H.R. 1956, the ‘‘Business Activity Tax Simplification Act of 2005,’’ from Carey J. ‘‘Bo’’ Horne, President, ProHelp Systems, 

Inc. ......................................................................................................................... 46

Response to Post-Hearing Questions from Lyndon D. Williams, Tax Counsel, 

Citigroup Corp. ..................................................................................................... 50

Prepared Statement of the American Bankers Association ................................. 52

Prepared Statements of Michael Mazerov, Senior Fellow, on behalf of the 

Center on Budget and Policy Priorities .............................................................. 53

Letter to the Honorable Chris Cannon from Arthur R. Rosen, Counsel, Coalition for Rational and Fair Taxation ................................................................... 100

Prepared Statement of the Council on State Taxation (COST) ........................... 120

Page

IV

CRS Report entitled ‘‘State Corporate Income Taxes: A Description and Analysis,’’ Updated May 11, 2005, Steven Maguire, Analyst in Public Finance, 

Government and Finance Division, submitted by the Honorable William 

D. Delahunt .......................................................................................................... 126

Letter to the Honorable Chris Cannon from Steve Bartlett, President and 

CEO, The Financial Services Roundtable: Industry Coalition ......................... 143

Letter to the Honorable F. James Sensenbrenner, Jr., from an Industry 

Coalition ................................................................................................................ 144

Letter to the Honorable Chris Cannon, and the Honorable Melvin Watt, 

from John Gay, Vice President, Government Relations, International Franchise Association (IFA) ........................................................................................ 148

Prepared Statement of David J. Pettit, President, American Distribution Centers for the International Warehouse Logistics Association ............................. 151

Letter to the Honorable Chris Cannon from Dan Glickman, Chairman and 

CEO, Motion Picture Association of America .................................................... 157

Prepared Statement of the National Governors Association, submitted by 

the Honorable William D. Delahunt ................................................................... 159

Letter to the Subcommittee on Commercial and Administrative Law from 

Paul J. Gessing, Director of Government Affairs, National Taxpayers Union 

(NTU) .................................................................................................................... 194

Letter to the Honorable Melvin L. Watt from the Honorable Marc Basnight, 

a Senator of the North Carolina General Assembly, submitted by the Honorable William D. Delahunt ................................................................................ 196

Letter to the Honorable Melvin L. Watt from the Honorable James B. Black, 

a Representative of the North Carolina General Assembly, and Speaker 

of the North Carolinia House of Representatives, submitted by the Honorable William D. Delahunt .................................................................................... 197

Letter to the Honorable Melvin L. Watt from the Honorable Michael F. 

Easley, Governor, State of North Carolina, submitted by the Honorable 

William D. Delahunt ............................................................................................ 198

Letter to the Honorable Melvin L. Watt from the E. Norris Tolson, Secretary, 

North Carolina Department of Revenue, submitted by the Honorable William D. Delahunt .................................................................................................. 200

Letter to the Honorable Chris Cannon from Richard J.M. Poulson, Executive 

Vice President, General Counsel & Senior Advisor to Chairman, and 

Vernon T. Turner, Corporate Tax Director, Smithfield Foods, Inc. (Smithfield) ...................................................................................................................... 206

Prepared Statement of the Software Finance and Tax Executives Council ....... 209

Prepared Statement of Chris Atkins, Staff Attorney, the Tax Foundation ........ 213

(1)

BUSINESS ACTIVITY TAX

SIMPLIFICATION ACT OF 2005

TUESDAY, SEPTEMBER 27, 2005

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COMMERCIAL

AND ADMINISTRATIVE LAW, COMMITTEE ON THE JUDICIARY, Washington, DC.

The Subcommittee met, pursuant to notice, at 1:05 p.m., in Room 

2141, Rayburn House Office Building, the Honorable Steve Chabot 

[Member of the Subcommittee] presiding. 

Mr. CHABOT [presiding]. The Committee will come to order. Good 

afternoon, ladies and gentleman. This hearing of the Subcommittee 

on Commercial and Administrative Law will come to order. I am 

not Chris Cannon, I am Congressman Steve Chabot. I am actually 

the Chair of the Subcommittee on the Constitution of the Judiciary 

Committee. 

Chairman Cannon regrets that he will be unable to be here this 

afternoon. The Ranking Member, Mel Watt from North Carolina, is 

unable to be here. So his shoes will be filled, and I am sure quite 

ably by the gentleman from Massachusetts, Mr. Delahunt, as well. 

So he and I will try not to screw this up too badly in the absence 

of our colleagues. 

Mr. DELAHUNT. We have the capacity to do that. 

Mr. CHABOT. I can only speak for myself. I can’t speak for Bill 

here. 

But today we will consider H.R. 1956, the ‘‘Business Activity Tax 

Simplification Act of 2005,’’ a measure intended to provide greater 

clarity for businesses navigating the tax landscape. This bill was 

introduced by the gentleman from Virginia, Congressman Goodlatte, on April 28th of this year, and it already has 28 cosponsors. 

H.R. 1956 is designed to address a fundamental problem related 

to interstate commerce. Specifically, when is a State justified in 

taxing a business with little or no physical connection with that 

State. Congress has examined this issue from time to time over the 

years. Recently, with the emergence of the Internet economy, and 

the explosion of service industries, the need for clear, concise taxation standards has become even more urgent. 

In 1959, Congress enacted Public Law 86–272, still in force 

today, prohibiting States from imposing a business activity tax on 

companies whose only contact with the State is the solicitation of 

orders for tangible goods. 

But those were simpler days. Since 1959, the economy has been 

reshaped dramatically. The emergence of the Internet has served 

2

as a major catalyst of this transformation. Companies offer not only 

tangible goods, but intangible property and services to customers 

across the country. 

But because Public Law 86–272 does not address intangible 

goods, the law falls short in addressing the current tax landscape. 

In addition, since 1959, many States appear to have engaged in 

practices that are at odds with the meaning and intent of Public 

Law 86–272. 

For example, States have begun to impose a tax on a company’s 

business activities on gross receipts rather than on net income. 

These developments have wreaked havoc on businesses. These 

businesses have incurred great expense in attempting to decipher 

and in many cases litigating the appropriate nexus standard for 

business activity taxes. 

H.R. 1956 would provide some certainty to this issue. It would 

amend Public Law 86–272 to apply to solicitation activities in connection with all sales, not just sales of tangible personal property. 

It would also cover all business activity taxes, not just net income 

taxes. 

It establishes a brightline 21-day physical presence requirement 

for the imposition of business activity taxes and would codify the 

current physical presence standard observed for years and elaborated by the Supreme Court in 1992 in Quill v. North Dakota. In 

Quill, the Court required that in order for a State to impose a requirement that remote vendors collect and remit sales taxes for 

sales made to customers in the State, the business must have a 

physical presence within the State. 

During the 107th and 108th Congresses, the Subcommittee considered similar measures also sponsored by our colleague, Mr. 

Goodlatte. The bill in the 107th Congress was reported out favorably by this Subcommittee, though the full Judiciary Committee 

did not have an opportunity to consider it prior to conclusion of 

that Congress. 

In the 108th Congress, this Subcommittee did not have an opportunity to consider the bill further after a legislative hearing, examining the issues in the bill. Seeking certainty amidst the confusion, 

numerous business associations have expressed their strong support for H.R. 1956, including the National Retail Federation, the 

National Association of Manufacturers, the Motion Picture Association of America, Inc., and the Software and Information Industry 

Association, to name only a few. 

In considering this legislation, Congress recognizes its responsibility under the U.S. Constitution to ensure that States do not unduly burden interstate commerce through the use of their taxing 

authority. We also seek to promote a legally certain and stable 

business environment that will encourage businesses to make investments. At the same time, we endeavor to do so without detracting from reasonable concepts of State and local taxing prerogatives. 

I look forward, as I know all the Members of this panel do, to 

the testimony of our highly informed panel before us here this 

afternoon. I ask unanimous consent that Members have 5 legislative days to submit written statements for inclusion in today’s 

record. 

3

I would now yield to the gentleman from Massachusetts, Mr. 

Delahunt, to make an opening statement. 

Mr. DELAHUNT. Yes. Thank you, Mr. Chairman. 

As you indicated, Mr. Watt, who is the Ranking Member of this 

particular Subcommittee, is unavailable because today he is in 

Haiti at the invitation of the Secretary of State. 

But I do speak for him when I say we believe this bill addresses 

very important, interesting and complex issues, and appreciate the 

opportunity for us to create a complete comprehensive and balanced record of the competing views of the various stakeholders. 

We have held hearings on prior iterations of this legislation. Yet, 

in the past few months, we have heard perspectives that have not 

been presented to this Subcommittee previously. Knotty policy 

choices and real-life implications are associated with this legislation. 

The Supreme Court seeks to overturn any Congressional legislation that urges us to expand. State and local legislatures advance 

sound Federalism and tax policy arguments against BATSA. They 

argue that in a borderless economy States must have flexibility to 

tax economic activity that generates millions in income for otherwise absent corporations. They further contend that the bill would 

undermine the ability of State and local governments to attract 

jobs and investment and would incentivise businesses to establish 

corporate structures that avoid legitimate taxation. 

The business community as a whole argues that State and local 

governments are abusing their power to tax and are systematically 

imposing multiple and discriminatory taxes on minimal activity 

within their borders. Subsets of the business community, service 

industry, retailers, financial institutions and others present specific, distinct and equally persuasive arguments in favor of the socalled brightline physical presence test. 

Finally, organizations like the Council on State Taxation support 

the enactment of the so-called physical presence nexus standard 

but only as a quid pro quo for enhanced State authority to require 

remote sellers of tangible goods to collect and remit sales taxes. 

This issue has been the subject of special legislation in the past, 

filed by myself. We believe that we must continue to consider carefully the implications of this bill. 

One thing is very clear to us, we must strike a very delicate balance, particularly in face of mounting unfunded mandates to ensure that State and local governments are not unfairly stripped of 

legitimate revenue to perform their traditional governmental functions, and that business entities are not unjustly strapped with illegitimate taxes that could weaken our overall economy. We hope the 

focus of this hearing and future hearings will be on determining 

where that delicate balance should be. 

Thank you, Mr. Chairman, and I thank the witnesses in advance 

of their contribution to this debate. On behalf of Mr. Watt, I express his regret for not being able to be in attendance here today, 

albeit, I would suggest, for an excellent reason. 

Mr. CHABOT. Thank you very much. I appreciate your opening 

statement. Does the gentleman from North Carolina, Mr. Coble, 

like to make an opening statement? 

4

Mr. COBLE. Very briefly, Mr. Chairman, I will say that Chairman 

Cannon and Ranking Member Watt have been replaced by superb 

substitutes. 

Mr. DELAHUNT. We agree. 

Mr. CHABOT. Take as much time as you like, Mr. Coble. 

Mr. COBLE. I figured that would get me additional time. This bill 

addresses a nagging problem that needs to be resolved. I oftentimes wonder, Mr. Chairman and Mr. Delahunt, if the disagreement is whether or not a substantial nexus has been established, 

A, or, B, whether anyone doing business in a State should be taxed. 

I think our good revenue collectors—I used to be one, Madam, so 

I can say that—we want to get our hands on every dime that is 

not nailed down. Then there are other folks who believe that no 

one should be taxed. Clearly those two extreme groups, I think, do 

not resolve the problem. 

Mr. Chairman, I look forward—I need to go to another hearing, 

but I look forward to as much of this hearing as I can be able to 

be here for. 

Thank you, Mr. Chairman. 

Mr. CHABOT. Thank you, Mr. Coble. We especially appreciate the 

first part of your statement. Mr. Franks, the gentleman from Arizona, is recognized if he would like to make an opening statement. 

Mr. FRANKS. Mr. Chairman, I think Mr. Coble pretty much expressed my sentiments, so we will go with that. 

Mr. CHABOT. Thank you very much. I appreciate your comments 

and attendance. The Chair notes and welcomes the presence on the 

dais of the gentleman from Virginia, Mr. Goodlatte. Although not 

a Member of the Subcommittee he is a Member of the full Judiciary Committee, and he is the sponsor of the legislation which we 

are dealing with here this afternoon. 

Mr. Goodlatte, we welcome you and are grateful for your continuing efforts. As many of you know, Mr. Goodlatte is also the 

Chairman of the Agricultural Committee, so he is a very powerful 

Member of the United States House of Representatives. The Chair 

will exercise its discretion in this instance and would recognize Mr. 

Goodlatte for a few minutes for any remarks that he might like to 

make. 

Mr. Goodlatte. 

Mr. GOODLATTE. Mr. Chairman, thank you very much for scheduling this hearing on the Business Activity Tax Simplification Act. 

I introduced this legislation with my good friend Rick Boucher of 

Virginia to provide a brightline of State and local authority to collect business activity taxes from out-of-State entities. Many States 

and local governments levy corporate income, franchise and other 

taxes on out-of-State companies that conduct business activities 

within their jurisdictions. While providing revenue for States, these 

taxes also serve to pay for the privilege of doing business in a 

State. 

However, with the growth of the Internet, companies are increasingly able to conduct transactions without the constraint of geopolitical boundaries. The growth of the high tech industry industry 

and interstate business-to-business and consumer transactions 

raises questions over whether multistate companies should be required to pay corporate income and other business activity taxes. 

5

Over the past several years, a growing number of jurisdictions 

have sought to collect business activity taxes from businesses located in other States, even though those businesses receive no appreciable benefits from the taxing jurisdiction, and even though the 

Supreme Court has ruled that the Constitution prohibits a State 

from imposing taxes on businesses that lack substantial connections to the State. 

This has led to unfairness and uncertainty, generated contentious, widespread litigation and hindered business expansion as 

businesses shy away from expanding their presence in other States 

for fear of exposure to unfair tax burdens. 

In order for businesses to continue to become more efficient and 

expand the scope of their goods and services, it is imperative that 

clear and easily navigable rules be set forth regarding when an 

out-of-State business is obliged to pay business activity taxes to a 

State. Otherwise, the confusion surrounding these taxes will have 

a chilling effect on e-commerce, interstage commerce generally and 

the entire economy as tax burdens, compliance costs and litigation 

and uncertainty escalate. Previous actions by the Supreme Court 

and Congress have laid the groundwork for a clear, concise and 

modern brightline rule in this area. 

In the landmark case of Quill Corporation v. North Dakota, the 

Supreme Court declared that a State cannot impose a tax on an 

out-of-State business unless that business has a substantial nexus 

with the taxing State. However, the Court did not define what constituted a substantial nexus for the purposes of imposing business 

activity taxes. 

In addition, over 40 years ago Congress passed legislation to prohibit jurisdiction from taxing the income of out-of-State corporations whose in-State presence was nominal. Public Law 86–272 set 

clear uniform standards for when States could and could not impose such taxes on out-of-State businesses when the business’s activities involve the solicitation of orders for sales. 

However, like the economy of its time, the scope of Public Law 

86–272 was limited to tangible personal property. Our Nation’s 

economy has changed dramatically over the past 40 years, and this 

outdated statute needs to be modernized. The Business Activity 

Tax Simplification Act both modernizes and provides clarity in an 

outdated and ambiguous tax environment. 

First, the legislation updates the protection of Public Law 86–

272. This legislation reflects the changing nature of our economy 

by expanding the scope of the protections in 86–272 from just tangible personal property to include intangible property in all types 

of services. In addition, our legislation sets forth clear, specific 

standards to govern when businesses should be obliged to pay business activity taxes to a State. Specifically the legislation establishes a physical presence test, such that an out-of-State company 

must have a physical presence in a State before the State can impose franchise taxes, business license taxes and other business activity taxes. 

The clarity that the Business Activity Tax Simplification Act will 

bring will ensure fairness, minimize litigation and create the kind 

of legally, certain and stable climate that encourages businesses to 

make investments, expand interstate commerce, grow the economy 

6

and create new jobs. At the same time, this legislation will protect 

the ability of States to ensure that they are fairly compensated 

when they do provide services to businesses that do have a physical 

presence in their State. 

Again, Mr. Chairman, thank you for holding this important hearing. 

Mr. CHABOT. Thank you very much. Before I begin with witness 

introductions, I ask unanimous consent that the record will remain 

open for 5 legislative days for other interested parties to submit 

statements for inclusion in the hearing record. 

Also, we have a number of statements from interested parties on 

all sides of this issue that I would like to have submitted for the 

record. I would ask unanimous consent to enter these statements 

into the record. 

Hearing no objection, these statements will be entered into the 

record. 

Now I would like to introduce our very distinguished panel here 

this afternoon. 

Our first witness is Bo Horne, the President of ProHelp Systems, 

Inc., a software development company located in Seneca, South 

Carolina. A graduate of the Georgia Institute of Technology with 

a degree in electrical engineering, Mr. Horne founded ProHelp Systems, Inc. in 1984. ProHelp designs, develops and markets highly 

complex and specialized product configuration, engineering and 

manufacturing software systems for electrical equipment manufacturers and creates systems integration software for mid-range and 

mainframe markets. 

Mr. Horne, thank you again for your appearance here today. We 

look forward to your testimony in just a couple of minutes here. 

The next witness is Earl Ehrhart, State Representative for the 

36th House District of the State of Georgia. 

Mr. Ehrhart has served in the Georgia House of Representatives 

since his first election in 1988. He is Chairman of the House Rules 

Committee and a Member of the Appropriations, Banking and 

State Institutions and Public Property Committees, and we welcome you here this afternoon, Mr. Ehrhart. 

You currently serve as the national chairman of the American 

Legislative Exchange Council, a nationwide bipartisan group of legislators. In recognition for his leadership, he has been honored with 

a Champion of the Free Enterprise System Award from the Associated Builders and Contractors of Georgia, and he has been the recipient of the Guardian of Small Business Award by the National 

Federation of Independent Business. Mr. Ehrhart earned his Bachelor’s Degree from the University of Georgia. 

When not serving in the legislature, he is the Senior Vice President of the Facility Group, Inc., an architectural and engineering 

firm. Mr. Ehrhart, we congratulate you for your substantial efforts 

and look forward to your testimony from a State perspective here 

this afternoon. 

Our next witness will be Joan Wagnon, Secretary of Revenue of 

the State of Kansas. Ms. Wagnon was appointed to her current position in 2001. Secretary Wagnon is a former six-term State legislator representing Topeka in the Kansas House from 1983 to 1994. 

She also was elected as the Mayor of Topeka in 1997 and served 

7

until 2001. Secretary Wagnon is the Chairman of the Multistate 

Tax Commission, as well as the Chair of the Midwestern States Association of Tax Administrators. She is also a member of the Federation of Tax Administrators board of directors and is actively involved in several charitable organizations, including the national 

board of the Girl Scouts U.S.A., the Midland Hospice of Topeka and 

the Downtown Rotary Club. 

Secretary Wagnon earned her Bachelor’s Degree from Hendrix 

College in Arkansas and her Master’s of Education in guidance and 

counseling from the University of Missouri. 

Secretary Wagnon, welcome, we appreciate your testimony here 

this afternoon. 

Our final witness is Lyndon Williams, Tax Counsel for Citigroup, 

Incorporated. Mr. Williams is responsible for providing advice and 

counsel on matters relating to the various aspects of tax law, including State and local taxation. He represents Citigroup as global 

e-commerce tax counsel, working with the Organization for Economic Cooperation and Development on tax policy matters involving international taxation. He is also a member of the tax committees of the Business and Industry Advisory Committee to the 

OECD and the United States Council for International Business. 

Mr. Williams earned a Bachelor’s Degree in business administration, majoring in accounting, from Baruch College at the City University of New York. He received his Master’s of Science Degree in 

taxation from Pace University Graduate School of Business in 

White Plains, New York and his law degree from Pace Law School. 

Mr. Williams is a member of the New York State Bar Association 

and the President of the Association of Black Lawyers of Westchester County. 

Mr. Williams, thank you very much for your appearance here 

this afternoon as well. 

We extend to each of you the warm regards and appreciation for 

your willingness to participate in today’s hearings. 

In light of the fact that your written statements will be included 

in the hearing record, we would request that you limit your remarks, if at all possible, to 5 minutes. 

You will note that we do have a lighting system up there. During 

the first 4 minutes of the 5 minutes, there will be a green light on. 

When you have 1 minute to go the yellow light will come on, and 

the red light means that you are supposed to wrap up. 

Chairman Cannon’s practice has been to tap the gavel at 5 minutes so you will know that your time is up, and we won’t gavel you 

down at that time but we would appreciate it if you would wrap 

it up close to that time if at all possible. 

Pursuant to the directive of the Chairman of the Judiciary Committee, I ask that the witnesses please stand because it is the practice of the Committee to swear in all witnesses before the Committee. 

[Witnesses sworn.] 

Mr. CHABOT. Let the record reflect that each of the witnesses answered in the affirmative, and you may all be seated. 

Mr. Horne, at this time you are recognized for 5 minutes. 

8

TESTIMONY OF CAREY J. ‘‘BO’’ HORNE, PRESIDENT,

PROHELP SYSTEMS, INC. 

Mr. HORNE. Thank you, Mr. Chairman. 

Mr. CHABOT. If you could turn that on. If you would pull the 

mike a little closer to you there. Thank you. 

Mr. HORNE. I am new at this. 

Mr. CHABOT. Okay. 

Mr. HORNE. Thank you, Mr. Chairman, and Members of the Subcommittee for this opportunity to support H.R. 1956, the Business 

Activity Simplification Act. I am Bo Horne, President of ProHelp 

Systems, a home-based software business in South Carolina. It is 

an honor being asked to address an issue so vital to small business. 

I represent no one but my wife, myself and our small business. We 

are here today at personal expense to plead for your support for a 

bill which clarifies the reasonable physical presence standard must 

be applied when determining nexus for interstate activity. 

Our experience clearly shows what happens when the standard 

leaves the smallest avenue open to abuse by greedy States. Our 

many conversations with people across this country also shows 

such abuses are far more common than generally recognized. Without strong Federal legislation, small businesses will soon be unable 

to participate in interstate commerce. We are speaking up because 

thousands of small businesses are totally unaware of today’s risks. 

In 1997, we sold one copy of our licensed software to a customer in New Jersey for $695. Because of this single sale, the State of 

New Jersey now demands that we pay $600 in taxes and fees every 

year the software remains in use, even in years with no sales, and 

regardless of any profit. Despite 2 years of effort and substantial 

legal fees, New Jersey continues to press its claim. Should all 50 

States adopt New Jersey’s corporate business tax, small software 

developers selling just one license in every State would owe 

$30,000 in business activity taxes every year thereafter even with 

no additional sales anywhere. Should localities follow suit the results would truly be astronomical. These are powerful reasons to 

stay out of the software business. 

We have little idea where our customers reside, but we are proud to have sold software in 32 countries. We have less than $30,000 

per year in domestic sales of licensed software. How can we provide 

jobs or even remain in this business if State taxes exceed total 

sales? 

The issue is not limited to software. New Jersey even defies protections of the Interstate Income Tax Act of 1959, which prevents 

States from imposing income tax for interstate activities where no 

physical presence exists. Today, if one of your constituents ships a 

box of paper clips to a customer in New Jersey, he will be subjected 

to the same tax. 

Ours is not an isolated case. We are personally aware of small 

business victims in multiple States, including three represented on 

this Subcommittee, North Carolina, Wisconsin and Virginia. We 

did not search for these victims. Desperate for help, they found us 

from testimony we submitted to this Subcommittee last year or 

from numerous articles written about our case. Each of you should 

understand that small businesses in your own State are already 

being wrongfully burdened by greedy States. 

9

The nightmares are certain to escalate. New Jersey increased its 

minimum tax 150 percent in 2002. This tax is effectively borne only 

by the smallest participants in interstate commerce. The victims 

are generally not capable of fighting. They capitulate to reduce the 

risk of larger penalties, and they have absolutely no representation 

in the matter except right here. 

Why should anyone believe this tax will not soon be increased 

again and spread to other States? Without clear protection such as 

BATSA provides, aggressive States will always seek to stretch the 

limits and to impose their own creative definitions to justify taxation most citizens would consider unjust. No small business can 

possibly cope with the widely varying and ever-changing laws of 50 

States, the administrative burdens of keeping records by State, or 

the costs of preparing and filing multiple returns, nor can we afford 

to pay inflated tax claims or legal fees required to defend against 

them. 

If Smithfield Foods has difficulty complying with State tax laws, 

as Tracy Vernon testified last year, how can small businesses ever 

do so? Many small businesses are not yet vocal with their support 

for this legislation. Most have no idea they may be involved in 

nexus issues or even what nexus means. They are totally unaware 

that many States will attempt to tax their activities. But as information tracking systems become more powerful and pervasive and 

as the Internet changes the very foundations of interstate commerce, small business will be trapped like a deer in headlights, totally defenseless against what is certain to happen, unless Congress uses its authority to protect us. 

Mr. Chairman, I would love to continue explaining why small 

businesses desperately need your help. My time is up, and I have 

provided more in writing, so I will close with one thought. The 

growing constraints on our participation in interstate commerce 

will ultimately impose economic costs our country simply cannot afford. Please act on this bill before more damage occurs. 

Again, it has been an honor to speak to you and I will be happy 

to answer questions. 

[The prepared statement of Mr. Horne follows:]

PREPARED STATEMENT OF CAREY J. (BO) HORNE

Thank you Mr. Chairman, Ranking Member Watt, and members of the Subcommittee for this opportunity to support H.R. 1956, the Business Activity Tax Simplification Act. I am Bo Horne, President of ProHelp Systems, a home-based software business in South Carolina. It is an honor being asked to address an issue so 

vital to small business. 

I represent no one but my wife, myself, and our small business. We are here today 

at personal expense to plead for your support for a bill which clarifies that a reasonable physical presence standard must be applied when determining nexus for Interstate activity. Our experience clearly shows what happens when the standard leaves 

the smallest avenue open to abuse by greedy States. Our many conversations with 

people across the Country also show such abuses are far more common than generally recognized. Without strong Federal legislation, small businesses will soon be 

unable to participate in Interstate Commerce. We are speaking up because thousands of small businesses are totally unaware of the risks. 

In 1997, we sold one copy of our licensed software to a customer in New Jersey 

for $695. Because of this single sale, the State of New Jersey now demands that 

we pay $600 in taxes and fees, every year the software remains in use, even in 

years with no sales, and regardless of any profit. Despite two years of effort and 

substantial legal fees, New Jersey continues to press its claim. 

10

Should all 50 States adopt New Jersey’s Corporate Business Tax, small software 

developers selling just one license in every State would owe $30,000 in business activity taxes every year thereafter, with no additional sales anywhere. Should localities follow suit, the results would truly be astronomical. These are powerful reasons 

to stay out of the software business. 

We have little idea where our customers reside, but we are proud to have sold 

software to customers in 32 countries. We have less than $30,000 per year in domestic sales of licensed software. How can we provide jobs, or even remain in this business, if State taxes exceed total sales? 

The abuse is not limited to software. New Jersey even defies protections of the 

Interstate Income Tax Act of 1959 (P.L. 86–272), which prevents States from imposing income tax for Interstate activities where no physical presence exists. Today, if 

one of your constituents ships a box of paper clips to a customer in New Jersey, 

he will be subjected to the same tax. 

Ours is not an isolated case. We are personally aware of small business victims 

in multiple States, including three represented on this Subcommittee: North Carolina, Wisconsin, and Virginia. We did not search for these victims. Desperate for 

help, they found us from testimony we submitted to this Subcommittee last year or 

from numerous articles written about our case. Each of you should understand that 

small businesses in your own State are already being wrongly burdened by greedy 

States. 

The nightmares are certain to escalate. New Jersey increased its minimum tax 

150% in 2002. This tax is effectively borne only by the smallest participants in 

Interstate Commerce. The victims are generally not capable of fighting, they capitulate to reduce the risk of larger penalties, and they have absolutely no representation in the matter except right here. Why should anyone believe this tax will not 

soon be increased again, and spread to other States? Without clear protections such 

as BATSA provides, aggressive States will always seek to stretch the limits and to 

impose their own creative definitions to justify taxation most citizens would consider 

unjust. 

No small business can possibly cope with the widely varying and ever changing 

laws of 50 States, the administrative burdens of keeping records by State, or the 

costs of preparing and filing multiple returns. Nor can we afford to pay inflated tax 

claims or legal fees required to defend against them. If Smithfield Foods has difficulty complying with State tax laws, as Tracy Vernon testified last year, how can 

small businesses ever do so? 

Many small businesses are not yet vocal with their support for this legislation. 

Most have no idea they may be involved in nexus issues or what nexus even means. 

They are totally unaware that many States will attempt to tax their activities. But, 

as information tracking systems become more powerful and pervasive, and as the 

Internet changes the very foundations of Interstate Commerce, small business will 

be trapped like a deer in headlights, totally defenseless against what is certain to 

happen, unless Congress uses its authority to protect us. 

Mr. Chairman, I would love to continue explaining why small businesses desperately need your help. My time is up, and I have provided more in writing; so 

I will close with one thought. 

The growing constraints on our participation in Interstate Commerce will ultimately impose economic costs our Country simply cannot afford. Please act on this 

bill before more damage occurs. 

Again, it’s been an honor to speak to you; and I will be happy to answer questions. 

ADDITIONAL INFORMATION

One very positive aspect of our saga has been the realization that our representative democracy works far better than we have been led to believe. We have been 

treated with courtesy, respect, and great empathy by the hundreds of representatives, state and federal officials, attorneys, businessmen, news editors, and private 

citizens we have spoken with about our ordeal. Without their enormous support and 

encouragement, we simply would not be here today. 

All of our Company’s work is performed in our home, we are the only employees 

(though we have had additional employees in prior years), and our company is our 

sole source of earned income. Our company is incorporated in Georgia and registered in Georgia and South Carolina. We have elected S Corporation status, operate and pay taxes as such, and file appropriate returns in Georgia and South Carolina each year. We pay employment taxes to South Carolina, and we acknowledge 

nexus in both Georgia and South Carolina. All work is conducted in South Carolina 

via the telephone, the Internet, and the U. S. Postal Service. 

11

The State of New Jersey is asserting a claim of nexus against our company due 

to the sale of seven intangible software licenses during the period 1997–2002. During this period, we generated total revenue from New Jersey-based customers of 

$6,132. By year, our sales into New Jersey for that period were $695, $0, $0, $0, 

$49, and $5388, respectively. Those are single dollars, not $K, $M, or $B. Of this 

total, $5,133 was derived from the actual license sales and $999 from additional 

services performed in South Carolina after the original sales. 

New Jersey acknowledges that its original claim of nexus was based solely on the existence of these seven software licenses within the state. New Jersey’s claim 

of nexus will be made as long as any licenses remain in use within the State, even 

if we cease accepting all business from New Jersey customers and generate zero future income from sales into the State. It is important to note there is nothing special 

about our license; it is very similar to ones provided with shrink-wrapped software 

commonly available at electronics or office supply stores such as Best Buy or Staples. 

New Jersey’s claim of nexus generates a requirement for our company to pay $500 

per year as the New Jersey minimum corporate tax and $100 per year for Corporate Registration fee, every year, even in years when we have zero sales in New 

Jersey and have no other business activity in the State. (If not for the minimum 

corporate tax and registration fee, our calculated tax would be less than $1.00 

in our best year.) 

We have been advised by the New Jersey Division of Taxation that the only way 

to remove our future liability for paying this $600 per year in tax and fees is to:

(1) stop accepting all orders from New Jersey,

(2) have zero New Jersey income,

(3) terminate all existing software licenses, and

(4) have our customers remove all licensed software from their systems. We 

have been advised that we cannot terminate our nexus in future years by 

abandoning our license agreements and giving clear title of the software to 

our customers.

We have met these requirements, as of December 31, 2003, through the following 

actions:

• We have terminated all of our national advertising. Our sales are down significantly as we attempt to refocus our activity into Georgia and South Carolina only.

• We have stopped accepting all orders from New Jersey locations. We cannot 

accept any business, of any type, from New Jersey locations until 

small business is given the protection it must have in order to participate in Interstate Commerce on a free and unhindered basis. In January 2004, we refused to accept a firm order for $15,000 of remote services 

from a Georgia customer who would have made payment through a New Jersey office. The risk of validating their claims of nexus in future years was simply too great for us to accept. Needless to say, this decision hurt our business badly.

• We have terminated all software licenses in New Jersey, and our customers 

have removed all licensed software and replaced it with new, unlicensed software. As a result, our intellectual property no longer receives the protection 

it must have in order to insure its viability for future enhancements and improvements and for our future income.

These actions have combined to significantly reduce and inhibit our participation 

in Interstate Commerce, reduce our sales, reduce our personal salaries, and reduce 

our payments of badly needed Federal and South Carolina tax revenues. We have 

become so concerned about the risk of our continued participation in Interstate 

Commerce that we are asking ourselves: ‘‘Why bother? Can we afford the risk? 

Should we terminate the business before it gets worse?’’ Our situation, and that of all small businesses participating in Interstate Com- merce, is simply intolerable. Had we sold just one $695 license in 1997 and not derived any further income from New Jersey customers, we would still be subject to 

the requirement of paying $600 per year in New Jersey taxes and fees as long as 

our customer continues to use the license. To fight this horribly unjust taxation, we 

have been forced to spend thousands of dollars in legal fees to defend ourselves; and 

we are continually distracted from pursuing our normal business activities which 

generate all of our earned income. 

Making the situation even worse, New Jersey has since expanded its regulations to assert nexus against all companies deriving any type of income

12

from New Jersey customers, regardless of physical presence or de minimis

activity. This latest provision of New Jersey tax regulations includes the sale of 

tangible products and is in direct defiance of Congressional intent and the physical 

presence standard of Public Law 86–272. Should all 50 states adopt these same provisions, the sale of a single box of paper clips in each state, at any point in time, 

would generate the requirement to file a state tax return in every State and to pay 

$30,000 in minimum taxes and fees per year, forever, even in years when no sales 

are made in those states, unless crucial steps are taken promptly to terminate 

nexus. And, New Jersey does not make that termination easy. 

More importantly, no company can survive by continually paying taxes 

on zero profits or by paying taxes greater than total sales. After our total 

sales are reduced by amounts not related to licensed software, by amounts for services, and by international sales, we have less than $30,000 in total domestic sales 

of licensed software. How can we develop, market, support products, and provide 

jobs, or even remain in this business, under those circumstances? 

New Jersey is not the only State adopting highly aggressive tactics which threaten small businesses. Such tactics are becoming more prevalent each year, and 

BATSA will stop the abuses. BATSA is simply vital for protecting small businesses 

by clearly codifying numerous existing judicial precedents and Congressional intent 

inherent in Public Law 86–272 and by providing a uniform and bright-line standard 

of physical presence for nexus. 

We realize there are multiple sides to every issue; for BATSA, there are at least 

three:

• Small businesses: Hopefully, we are sufficiently conveying why the passage 

of BATSA is so absolutely critical if small businesses are to participate in 

Interstate Commerce.

• Large businesses: Having worked for and with large businesses for many 

years, we understand and support their need for clarity and simplification of 

the rules which would allow them to devote more attention to delivering products and services instead of defending themselves in legal actions.

• The States: Why are they so strongly resisting BATSA?

(a) We totally reject their claims of State sovereignty. Our Founding Fathers, 

who created the best form of government our world has known, wisely understood that Federal regulation would be vital toward assuring a vibrant 

National economy and gave the Congress broad powers to regulate Interstate Commerce. They included the Commerce Clause to cure a problem 

that had already occurred during the Colonial period. It is the exact problem small businesses face today: greedy States, totally unconcerned about 

the National economy. The Commerce Clause gives this Congress very 

clear and absolute authority to regulate this critical area of our economy. 

Without question, Congress has absolute jurisdiction to protect the rights 

of hundreds of thousands of small businesses attempting to participate in 

Interstate Commerce, free from undue burdens associated with paying 

taxes in multiple States; and the States ceded all rights for any claims 

of sovereignty over this issue when they joined the Union.

(b) We also reject their wildly exaggerated claims of lost revenues. Several 

analyses have been made, but has a single one ever factored in the loss 

of hundreds of thousands of jobs, perhaps millions, because small businesses cannot safely participate in Interstate Commerce? We can guarantee that tax revenues obtained from small businesses will begin declining soon, and many jobs will be lost, unless our problem is corrected now. 

No small businessman, once he understands the risks involved, will dare 

participate in Interstate Commerce. 

The distribution of taxable income may change among the 

States, but it should. We do all work from our home; all of our economic 

activity occurs there. Shouldn’t we pay all our taxes to South Carolina? 

Shouldn’t this apply equally to large businesses with no physical presence 

in a State? If a State’s revenue drops due to passage of this bill, it is because the State is already engaging in unfair tactics; and its revenue 

should and must drop. Many States are already losing a portion of their 

own legitimate tax revenues to the greedy States.

(c) A possible threat to States’ revenues arises from the improper use of intangible holding companies. If an intangible holding company licenses intangible property to an unrelated company, then it should receive the 

protection the physical presence standard provides. If the intangible holding company operates only to avoid taxation, without other legitimate 

13

business purposes, the States have several remedies they have traditionally employed to prevent loss of income; and many States have already 

enacted one or more of them. So, this issue is no reason to avoid prompt 

passage of this bill.

New Jersey is targeting numerous small businesses which sell to Casinos and 

therefore must be registered (by the Casino, not the small business) with the Casino 

Control Commission (CCC). The CCC even sends registrants a letter clearly indicating they don’t have to do anything else unless they sell more than $75,000 to 

a single casino in a single year. No mention is made of any State requirement to 

file or pay income taxes simply because an Interstate sale has been made. We even 

called, twice, to verify there were no additional steps for us to take. New Jersey is 

also using all other possible types of such independent registrations to pursue small 

Interstate businesses. 

Further, and it is a matter of public record, Governor McGreevey of New Jersey 

was asked by the media during the signing ceremony for its CBT tax increase about 

the effect the tax would have on small businesses. The Governor indicated that New 

Jersey would not be going after small businesses. It is now clear that he had little 

or no control over his State agencies, was mistaken, or simply lied about what was 

soon to begin. New Jersey has thus violated basic requirements of Due Process and 

is at least guilty of the entrapment of many small businesses. 

Many scholars and tax experts believe the Supreme Court has spoken very clearly 

in numerous decisions regarding Interstate nexus issues and the Congress has spoken very clearly with the physical presence standard in Public Law 86–272. Given 

the problems so obvious today, how can anyone justify not providing total clarity 

for all sales? How can anyone justify our paying any tax to any State except South 

Carolina or Georgia, where all of our economic activity occurs? 

Customers in other States occasionally seek to buy our products because similar 

products are not available in their own State, ours are superior for their needs, or 

ours are less costly. Customers buying our products actually save money by doing 

so, thereby increasing their own profits and their own tax obligations within their 

own States. New Jersey has provided no services to our Company. We have not attempted to market explicitly to customers in New Jersey. To the contrary, customers 

in New Jersey came to us because our products provide some advantage to them. 

Why should such a purchase create a new tax obligation for our Company? The Congress is going to great lengths to promote free international trade while this horrible 

situation restrains trade within our own borders. 

As a private citizen and small businessman, I have concluded the passage of 

BATSA is the fair and right thing to do for all business, both large and small, 

that it is vital for protecting small businesses, that it is vital for protecting jobs and 

our economy, that States’ claims of various harms are ill-advised and simply not 

true, and that all sales should be treated equally as intended by the Congress when 

it passed Public Law 86–272. Otherwise, very large portions of our economy (i.e., 

intellectual property, remote services, and small businesses in particular) become 

highly disadvantaged in their conduct of Interstate marketing activity. 

Because physical presence was intended to be the current standard, BATSA would 

neither diminish the taxing powers of state and local jurisdictions nor reduce state 

and local tax revenues. It will allow businesses to concentrate on growing our economy and providing jobs, instead of arguing legal points at great cost, by ensuring 

no undue burdens hinder Interstate Commerce. 

We beg for your support and prompt passage of this bill, on behalf of the thousands of small business owners nationwide whose economic futures rely on it, and 

on behalf of continued strength in our National economy.

Mr. CHABOT. Thank you very much, Mr. Horne. 

Representative Ehrhart is recognized for 5 minutes. 

TESTIMONY OF EARL EHRHART, STATE REPRESENTATIVE, 

GEORGIA HOUSE OF REPRESENTATIVES, 36TH DISTRICT, 

NATIONAL CHAIRMAN OF THE AMERICAN LEGISLATIVE EXCHANGE COUNCIL 

Mr. EHRHART. Thank you, Mr. Chairman and Members of the 

Committee. I also found the Chairman and Ranking Member comments edifying as to my time. 

14

My name is Earl Ehrhart. I am a State Representative in Georgia, where I chair the Georgia House Rules Committee. I also 

serve, as you noted, as the ALEC national Chair. 

The American Legislative Exchange Council is the Nation’s largest bipartisan individual membership organization of State legislators. We have over 2,400 members from all 50 States and 97 members, former members in Congress today. 

It is my pleasure to appear before you to present testimony regarding H.R. 1956, the ‘‘Business Activity Tax Simplification Act.’’ I was elected in Georgia’s 36th District to represents my constituents’ interest in Georgia. Part of that responsibility is to ensure 

that our State develops a business climate that expands opportunities for our existing companies and attracts new business investment. 

As a State legislature, however, there’s only so much I can do to 

help develop a solid business climate in Georgia. Many entrepreneurs in Georgia do business all over the United States in our 

new economy and all over the world. We need the help of Congress 

to ensure that the Georgia-based companies aren’t being 

unjustifiably taxed by those States in which they have no physical 

presence. Today we see an increased tendency of lawmakers and 

revenue officials in other States to get aggressive when it comes to 

raising of revenue from out-of-State companies. If our State is making that effort to provide an infrastructure to attract and maintain 

business in our State, we should be the ones to enjoy those same 

benefits. 

If we don’t curb this aggressive behavior by other States, we are 

going to lose our ability to provide a prosperous business environment in Georgia. H.R. 1956, with its physical presence, is a good 

step toward protecting that same ability. If companies are paying 

States taxes only where they are physically present, then we can 

be comfortable knowing that we can attract business to Georgia, 

give them the services we need, get the taxes we need in return 

to help pay for those services and hopefully persuade them to reinvest in our State. 

I am not the only State lawmaker who holds that view. As I 

mentioned earlier, I am the chairman, the national chairman of 

ALEC. ALEC in 2003 approved a model resolution, a resolution on 

State and local business activity taxes calling on Congress to expand and protect the physical requirement. I have passed out a 

copy of that for your perusal. 

Our resolution states very simply, the physical presence standard 

promotes fairness by assuring that businesses that receive benefits 

and protections provided by State and local governments pay their 

fair share for these services and the ability of State and local jurisdictions to tax out-of-State businesses should be limited to those 

situations in which the business has employees and/or property in 

the taxing jurisdiction and accordingly receives meaningful government benefits or protections from that jurisdiction. ALEC supports 

this approach because it is consistent with our Jeffersonian principles of individual liberty, limited government and free markets, 

and not without interest, it supports Federalism and not the other 

way around. States should not be able to tax those companies that 

are not physically present in their State. 

15

A more expansive approach, called economic presence by some, 

exposes businesses to more taxes, more litigation, but less money 

and time to invest and grow the economy. I know some of my colleagues from other organizations, the MTA, have a different opinion about this bill. I would like to take just a moment to address 

their concerns in particular, tax revenue losses and tax shelters. 

You have heard in the past, and we will hear in the future that 

this legislation, physical presence approach in general, will lead to 

a substantial revenue loss for States. It has been argued that we 

should refrain from acting on this bill because States will lose revenue needed to pay for schools, roads, health care and police protection. Just anecdotally, States have a spending problem and not 

a revenue problem. Beware of these revenue estimates. These estimates are based on assumptions that the State revenue departments can and should be collecting all the taxes from all the corporations they say they should. Since the issue of physical presence 

is unclear, it is not fair to claim they will lose revenue, merely because they believe corporations should be paying a certain amount 

of taxes based on their questionable interpretation of the law. 

As for tax sheltering, again I respectfully disagree that this bill 

will make tax sheltering worse. It is important to remember the 

tax shelter is in the eye of the beholder. The U.S. Constitution certainly isn’t a tax shelter. H.R. 1956 is not a tax shelter. I believe 

the physical presence rule best embodies the presence that we find 

in our Constitution and our laws. I am baffled by my colleagues’

insistence that this bill would only serve to open up our States to 

more corporate tax sheltering. 

Once again, even if my colleagues are right, the States have tools 

to fight these abusive tax shelters. Sham transactions and those 

that lack economic substance can certainly be fought even if H.R. 

1956 becomes law. Lawmakers in other States, Georgia in particular—we have gotten aggressive with that with addbacks, 

throwbacks, passive investments, the single factor taxation that we 

passed last year in Georgia. These are tools that we have to accomplish these goals. 

In conclusion, Mr. Chairman, thank you for the opportunity to 

give the perspective of my constituents, as well as of that ALEC. 

The American Legislative Exchange Council is supportive of the 

flexibility that the physical presence requirements as outlined in 

1956, and we look forward to working with you in the days and 

months ahead to enhance our States’ business climate through a 

limited government approach. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Ehrhart follows:]

PREPARED STATEMENT OF THE HONORABLE EARL EHRHART

INTRODUCTION

Good morning Chairman Cannon, Representative Watt and Members of the Committee: 

My name is Earl Ehrhart, I am a State Representative in Georgia where I chair 

the Georgia House Rules Committee. I also serve as the National Chairman of the 

American Legislative Exchange Council. 

The American Legislative Exchange Council (ALEC) is the nation’s largest nonpartisan, individual membership organization of state legislators with over 2,400 

legislator members from all fifty states and 97 members in the Congress. It is my 

16

pleasure to appear before you to present testimony regarding H.R. 1956, the ‘‘Business Activity Tax Simplification Act of 2005.’’

GEORGIA

I was elected in Georgia’s 36th District to represent my constituents’ interests in 

the Georgia General Assembly. Part of that responsibility is to ensure that our state 

develops a business climate that expands opportunities for our existing companies 

and attracts new business investment. 

As a state legislator, however, there is only so much I can do to help develop a 

solid business climate in Georgia. Many entrepreneurs in Georgia do business all 

over the United States and the world. We need the help of Congress to ensure that 

Georgia-based companies aren’t being unjustifiably taxed by those states in which 

they have no physical presence. 

Today, we see an increased tendency of lawmakers and revenue officials in other 

states to get aggressive when it comes to raising revenue from out-of-state companies. If our state is making the effort to provide an infrastructure to attract and 

maintain business in our state, we should be the ones to enjoy the benefits. 

If we don’t curb this aggressive behavior by other states, we are going to lose our 

ability to provide a prosperous business environment in Georgia. H.R. 1956, with 

its physical presence requirement, is a good step toward protecting our ability to develop the Georgia business climate my constituents expect me to support in the 

Georgia General Assembly. 

If companies are paying state taxes only where they are physically present, then 

we can be comfortable knowing that we can attract business to Georgia, give them 

the services they need, get the taxes we need in return to help pay for those services, and hopefully persuade them to reinvest in our state. If businesses are going 

to be taxed anywhere they have customers or are making sales, then our efforts to 

recruit these companies will be in vain. Instead of reinvesting in the Georgia economy they will be paying taxes where they have no physical presence. 

This policy is bad for Georgia’s economy and bad for my constituents who need 

those high paying jobs to support their families and to realize their dreams. Let’s 

restore sense and clarity to where our businesses pay their taxes. Simply stated, 

business should pay taxes where they hold a physical presence. 

AMERICAN LEGISLATIVE EXCHANGE COUNCIL RESOLUTION,

STATE AND LOCAL BUSINESS ACTIVITY TAX

I am not the only state lawmaker that holds this view. As I mentioned earlier, 

I am the National Chairman of the American Legislative Exchange Council, or 

ALEC. ALEC is a nonpartisan, individual membership organization of over 2,400 

state legislators. In 2003, ALEC approved a model resolution, ‘‘Resolution on State 

and Local Business Activity Taxes,’’ calling on Congress to protect and expand the 

physical presence requirement for the state collection of business activity taxes. I 

have attached a copy for your perusal. Our resolution states:

‘‘the physical presence standard promotes fairness by ensuring that businesses 

that receive benefits and protections provided by state and local governments 

pay their fair share for these services’’; and

‘‘the ability of state and local jurisdictions to tax out-of-state businesses should 

be limited to those situations in which the business has employees and/or property in the taxing jurisdiction and accordingly receives meaningful governmental benefits or protections from the jurisdiction’’

ALEC supports this approach because it is consistent with the Jeffersonian principles of individual liberty, limited government, and free markets. States should not 

be able to tax those companies that are not physically present in their state. 

ECONOMIC PRESENCE—A MODEL FOR DISASTER

A more expansive approach, called economic presence by some, exposes business 

to more taxes, more litigation, but less money and time to invest and grow the economy. We have been told, through decades of congressional action and court rulings, 

that interstate commerce is so expansive that it allows Congress to regulate just 

about any activity in America. I fear for our Georgia-based companies, if the states 

take the same expansive approach to economic presence. Those of us who advocate 

a limited government approach, like my colleagues at ALEC, strongly support the 

physical presence approach to state business taxes. 

17

TAX REVENUE LOSSES AND TAX SHELTERING

I know some of my colleagues from other organizations have a different opinion 

about this bill. I would like to take just a moment and address their concerns, in 

particular, tax revenue losses and tax sheltering. 

You have heard in the past, and will hear in the future, that this legislation—

and the physical presence approach in general—will lead to substantial revenue loss 

for the states. It has been argued that you should refrain from acting on this bill 

because states will lose revenue needed to pay for schools, roads, health care, and 

police protection. 

Be wary of these revenue estimates. These estimates are based on assumptions 

that the state revenue departments can and should be collecting all the taxes from 

corporations they say they should. Since the issue of physical presence is unclear, 

it is not fair to claim they will lose revenue merely because they believe corporations 

should be paying a certain amount of taxes based on their questionable interpretation of the law. 

Furthermore, even if my colleagues are correct, and some states do lose tax revenue if this bill becomes law, I say this is as it should be. Corporations should pay 

taxes only in those states where they are physically present. If my counterparts in 

other states want to raise more taxes from corporations, they should do so by encouraging them, through lower taxes and other means, to locate in their state, or 

by raising taxes on their own companies—not by coercing them to pay taxes even 

when they are not physically present in their state. This is what tax competition 

is all about. 

As for the tax sheltering issue, again, I respectfully disagree with my colleagues 

that this bill will make tax sheltering worse. It is important to remember that a 

tax shelter is in the eye of the beholder. The U.S. Constitution is certainly not a 

tax shelter. H.R. 1956 is not a tax shelter. I believe the physical presence rule best 

embodies the principles that we find in our Constitution and our laws. I am baffled 

at my colleagues’ insistence that this bill would only serve to open up our states 

to more corporate tax sheltering. 

But once again, even if my colleagues are right, the states have the tools to fight 

abusive tax shelters. Sham transactions and those that lack economic substance can 

certainly be fought even if H.R. 1956 becomes law. Furthermore, lawmakers in other 

states are certainly moving forward with a number of new measures to fight tax 

shelters, including disallowance of deductions to passive investment companies, 

addback, and the use of throwback in apportionment. Just this year, Georgia passed 

an addback amendment in the Georgia House Bill 191. Let me assure you that the 

arsenals that states have in our battle against tax shelters will remain virtually intact if you pass this bill. 

CONCLUSION

Mr. Chairman, thank you for the opportunity to give the perspective of my constituents as well as that of ALEC. The American Legislative Exchange Council is 

supportive of the flexibility and physical presence requirements as outlined in H.R. 

1956. We look forward to working with you in the days and months ahead to enhance states’ business climate through a limited government approach. 

Thank you. I would be please to answer any questions you might have. 

18

ATTACHMENT


EE1.eps
19


EE2.eps
20

Mr. CHABOT. Thank you very much. 

Secretary Wagnon, you are recognized for 5 minutes. 

TESTIMONY OF JOAN WAGNON, SECRETARY OF REVENUE, 

STATE OF KANSAS, AND CHAIR, MULTISTATE TAX COMMISSION 

Ms. WAGNON. Thank you, Mr. Chairman, Congressman 

Delahunt, and Members of the Committee. I appreciate the opportunity to address you today. I am Joan Wagnon, Secretary of Revenue for the State of Kansas and Chair of the Multistate Tax Commission. 

Today I represent the Commission and its members in our opposition to 1956, or BATSA, and I would like to make four points, 

which are elaborated in my written testimony. 

First of all, BATSA’s proponents claim it would ensure fairness 

and a level playing field, but that is wrong. It will lead to more nowhere income, corporate income that is beyond the jurisdiction of 

any State, and that is hardly fair to the rest of the businesses that 

pay taxes on all of their income and cannot take advantage of tax 

avoidance opportunities. 

Secondly, BATSA will have a severe fiscal impact on many of the 

States. Many people on this Subcommittee have served in State 

legislatures. How would you have viewed a Federal law that would 

have forced you to raise taxes or cut services to replace lost corporate tax revenues, this Committee charged with making sure 

that administrative rules don’t raise Federal taxes? Why would you 

allow that to happen to the State by passing this bill? 

According to a study released just today by the National Governors’ Association, H.R. 1956 could strip States of approximately $6.6 billion. That happens because it extends Public Law 86–272 

to a variety of business taxes, not just corporate income, and shelter some income in safe harbors. NGA estimates that 11 percent 

of business activity tax could vanish as companies take opportunities to restructure and use the benefits of this bill. We figured in 

Kansas we would lose $25 million or more each year. 

These tax breaks favoring certain kinds of large companies either 

force States to shift that tax burden back on property, sales or income taxes or reduce services like schools and health care. At a 

time when there is bipartisan support in Congress for shutting 

down tax shelters and closing loopholes in the Federal corporate income tax, it would be ironic if Congress enacted a bill to undermine 

the same critical source of revenue for the States. 

Third, I want to give you some real examples developed by my 

Kansas staff of attorneys and auditors of how tax avoidance planning will work using the safe harbors in this bill to allow businesses that already have physical nexus in Kansas, and they will 

reduce their liabilities. 

A manufacturing scenario, we have a tire company in Kansas 

that makes tires and sells them nationwide. Currently, all property 

income and sales are used to apportion income in Kansas. Using 

BATSA’s safe harbors the company can reorganize itself into several entities, one to own the plant facility and equipment, an outof-State company to own and lease the materials used for the tires, 

and a third to employ the Kansas factory workers. All remain comVerDate 0ct 09 2002 11:51 Jan 12, 2006 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6601 G:\WORK\COMM\092705\23640.000 HJUD1 PsN: 23640
21

monly owned. Under the safe harbor for manufacturing materials, 

the out-of-State company suddenly has no nexus with Kansas and 

the value of the materials located at the Kansas plant would be excluded from the numerator of their property factor, and it reduces 

the Kansas apportionment factor and Kansas taxable business income. This would apply to our aircraft industry and many other 

manufacturing. 

A retail scenario. Several out-of-State retailers of computers or 

electronic devices market their computers to their customers in 

Kansas via the catalog and Internet and use an independent contractor in Kansas to provide the warranty service to the customers. 

Under the independent contractor safe harbor, the out-of-State retailer now has no nexus in Kansas and we lose revenue which we 

currently have. 

Financial services companies, banks, all are likely to restructure 

to benefit from H.R. 1956. Every service that a bank offers now can 

be conducted without a customer and a building. Out-of-State 

banks or Internet banks free themselves of their fair share of taxes 

while the smaller community banks see their customer bases diminish. 

This threat to our tax base is real, not some manipulation of 

numbers for shop value in a public hearing. These are real examples, and they point out the unfairness of allowing preferential tax 

treatment for some businesses while others never gain this advantage. 

Finally, for almost 230 years, while maintaining its jurisdiction 

over interstate commerce, Congress has consistently respected the 

right of States to raise revenues. Encroachment on State tax authority clearly violates the most principled value of Federalism on 

which our Nation was developed. The economy of the 21st century, 

as has been noted, is electronic and borderless. Most businesses 

can operate anywhere without physical presence. This bill takes 

19th century tax law and imposes it on a 21st CENTURY economy 

and harms our States’ abilities. 

I ask you not to support it. Thank you. 

[The prepared statement of Ms. Wagnon follows:]

PREPARED STATEMENT OF JOAN WAGNON

Mr. Chairman, Congressman Watt, and Members of the Subcommittee: 

Thank you for the opportunity to address the Subcommittee concerning H.B. 1956, 

the Business Activity Tax Simplification Act of 2005. I am Joan Wagnon, Secretary 

of Revenue for the State of Kansas. I have previously served as President of Central 

National Bank of Topeka, Mayor of Topeka, Kansas, and as a six-term member of 

the Kansas House of Representatives. 

Two months ago, I was elected Chair of the Multistate Tax Commission. The 

Multistate Tax Commission is an organization of state governments that works with 

taxpayers to administer, equitably and efficiently, tax laws that apply to multistate 

and multinational enterprises. Created by the Multistate Tax Compact, the Commission is charged by this law with:

• Facilitating the proper determination of State and local tax liability of 

multistate taxpayers, including the equitable apportionment of tax bases and 

settlement of apportionment disputes;

• Promoting uniformity or compatibility in significant components of tax systems;

• Facilitating taxpayer convenience and compliance in the filing of tax returns 

and other phases of tax administration;

• Avoiding duplicative taxation.

22

Created in 1967, forty-six states participate in the work of the Multistate Tax Commission. I am here today representing the Commission and its members in our opposition to HR 1956. 

Overview 

In reviewing the provisions of H.R. 1956, and its predecessors, I found plenty of 

provisions that troubled me, but I could not figure out what positive policy goals 

that the legislation would accomplish. So I turned to the website of the bill’s proponents, www.batsa.org, and found that they claim it would accomplish four goals: 

ensure fairness, minimize litigation, grow the economy, and ensure a level playing 

field. In my review of the legislation and in consultation with many persons whose 

judgment I trust and value, I find that H.R. 1956 accomplishes none of these goals.

• Does it ensure fairness? No.

• According to the Congressional Research Service, legislation such as H.R. 

1956 would lead to more ‘‘nowhere income,’’ that is corporate income that 

is beyond the tax jurisdiction of any state in our Nation. That’s hardly fair 

to the rest of the businesses that pay taxes on all their income!

• Does it minimize litigation? No.

• H.R. 1956 is anything but clear and simple. Any new set of rules is an invitation to litigate, but this change would invalidate forty years of judicial 

interpretation of P.L. 86–272 for no good reason.

• Will it grow the economy? No.

• The economy suffers when businesses devote resources to reorganizing and 

restructuring to take advantage of tax laws instead of improving productivity. H.R. 1956 will also alter states’ economic development strategies as 

more and more businesses seek to minimize physical presence in taxing jurisdictions. Furthermore, since the taxes affected by this legislation account 

for only about 1 percent of the output of non-farm businesses, it is difficult 

to see how enactment of this bill would unleash a great wave of business 

investment.

• Will it ensure a level playing field? No.

• In my state of Kansas and in other states as well, smaller, more local firms 

will not have the opportunity to take advantage of the tax planning opportunities that larger, multistate firms would use under H.R. 1956.

• For example, every service a bank offers can now be conducted without a 

customer in a bank building. Out of state banks or internet banks with 

their larger economies of scale can free themselves of their fair share of 

taxes while smaller community banks see their customer bases dwindle. 

Mortgage banking over the internet is just one good example.

It is clear enough that H.R. 1956 will not accomplish what it sets out to do. What 

is even worse is the severe impact that it will have upon the States. Many of you 

on this subcommittee have served in state legislatures. Think about that experience 

as I present three points for your consideration. 

I. H.R. 1956 WILL FORCE OTHER STATE TAXES TO RISE TO REPLACE LOST STATE TAX

REVENUES FROM H.R. 1956. 

Section 4 of H.R. 1956 greatly expands Public Law 86–272 which covers only corporate income taxes, to add gross receipts taxes, business license taxes, business 

and occupation taxes, franchise taxes, single business taxes, capital stock taxes, as 

well as many others. In Kansas, H.R. 1956 will apply to our corporate income tax, 

corporate franchise tax, and bank privilege tax—a definite expansion of Public Law 

86–272. 

According to a study just released by the National Governors’ Association, H.R. 

1956 could strip states of $4.8 billion to $8.0 billion in much needed business activity tax revenues, depending on how widely it is used by businesses. Imagine what 

will happen to these states when an estimated $6.6 billion (the midpoint of the estimated range) in state revenues vanishes. This represents an estimated 11.4 percent 

of business activity tax collections by states as companies restructure to take advantage of the benefits authorized by H.R. 1956. 

Kansas alone could easily lose $25 million, or more, each year under H.R. 1956, 

which is a large loss in our small state. We are coming out of the recession slowly, 

and are under court order to increase funding for schools dramatically. The state 

cannot afford any narrowing of our tax base. These tax breaks for a select group 

of large companies would simply shift that tax burden back onto property taxes, 

sales taxes or income taxes paid by individuals and small businesses in our states. 

23

The only other option for states would be a dramatic curtailment of essential state 

services, such as schools, health and safety programs, etc. 

II. H.R. 1956 IS INCONSISTENT WITH CURRENT FEDERAL POLICY BY

PROMOTING TAX SHELTERING. 

Congress and the Internal Revenue Service are currently challenging federal tax 

sheltering schemes. A report from Center for Budget and Policy Priorities said, ‘‘At 

a time when there is strong bipartisan support in Congress for shutting down tax 

shelters and closing loopholes that afflict the federal corporate income tax, it would 

be unfortunate and ironic if Congress enacted legislation like H.R. 1956 that would 

severely undermine the same—and equally critical—source of revenue for states.’’

(‘‘Federal ‘Business Activity Tax Nexus’ Legislation: Half of a Two-Pronged Strategy 

to Gut State Corporate Income Taxes,’’ Revised May 9, 2005) 

Professor John Swain writes in the William and Mary Law Review (Vol.45:319–

20, October 2003) that ‘‘the physical presence nexus test motivates taxpayers to 

avoid physical presence in some jurisdictions while shifting property and payroll to 

tax havens.’’ The Congressional Research Service reported that legislation such as 

H.R. 1956 would expand ‘‘the opportunities for tax planning and thus tax avoidance 

and possibly evasion.’’ (‘‘State Corporate Income Taxes: A Description and Analysis,’’

CRS, Updated March 9, 2005). 

‘‘Tax sheltering,’’ for state business activity tax purposes, means that income is not 

being fully reported to each state in a manner that ‘‘fairly represents’’ the business 

activity actually being conducted by the enterprise in each state in proportion to the 

property it uses, the people it employs or the sales it makes in each state. ‘‘Fairly 

represents’’ is a policy standard established in the Uniform Division of Income for 

Tax Purposes Act (UDITPA), as proposed by the American Bar Association. 

HOW DOES H.R 1956 ENCOURAGE TAX AVOIDANCE?

Kansas uses a three factor formula of property, payroll and sales, and is a combined reporting state with a ‘‘throwback’’ rule. (States with a single factor formula, 

sales, will have much heavier losses.) If this law were to pass this year, the immediate impact on our state would be only $5–6 million, because companies would need 

to restructure to take full advantage of the tax avoidance opportunities which exist 

in the new law. But they will do this; why else would the proponents push so hard? 

In 1989 Kansas had 33,581 corporate tax payers. Fifteen years later that number 

had dropped to 23,160 as taxpayers took advantage over time of changes in tax law, 

abandoned the C Corporation and started utilizing LLC’s, LLP’s, and a variety of 

other structures. Similarly, corporate income tax receipts now account for a much 

smaller portion (2.5%) of total state taxes collected by the department and deposited 

in the state general fund than they did even a decade ago (8.4%). 

The point is that HR 1956 would stimulate another round of tax planning and 

tax avoidance, causing states’ revenue streams to erode further. 

The following 4 scenarios were developed by a team of Kansas auditors, attorneys 

and policy analysts who met recently to evaluate the fiscal impact of HR 1956. They 

looked at the manufacturing, retail and service sectors of the Kansas business tax 

base, analyzed the proposed legislation, and then figured out how certain businesses 

could lower their taxes using the ‘‘safe harbors’’ to allow businesses that already 

have physical nexus with Kansas to substantially reduce their tax liabilities.

Manufacturer scenario 

Company A makes tires in Kansas and sells them nationwide. In order to 

take advantage of H.R. 1956 safe harbors, company A breaks itself up into several separate entities: company B owns/leases the plant facility and equipment 

in Kansas, company C, located out-of-state, owns/leases the materials used to 

make the tires, and company D employs the Kansas factory workers. All remain 

commonly owned. Under the safe harbor for manufacturing materials (up to the 

point those materials become the finished product/inventory), company C has no 

nexus with Kansas, and the value of the materials at the Kansas plant owned/

leased by company C would appear to be excluded from the numerator of the 

property factor, thus reducing the Kansas apportionment factor, and Kansas’

share of any taxable business income. 

This same scenario could apply as well to an aircraft manufacturer in Kansas. 

An affiliated out-of-state entity owns/leases the materials (up to the point they 

become the finished product) being manufactured into aircraft. Another entity 

owns/leases the Kansas manufacturing facility, and yet another employs the 

Kansas factory workers. The owner of the materials and unfinished produced 

items would appear to be shielded from nexus under an H.R. 1956 safe harbor.

24

Retailer scenario 

An out-of-state retailer of computers or other electronic devices markets its 

products to Kansas customers via the Internet. The sale of computers and electronic devices includes warranty contracts. The out-of-state retailer contracts 

with an independent contractor located in Kansas to provide the warranty service to its Kansas customers. The independent contractor provides similar services to other out-of-state retailers, all of which could be affiliates of one another. 

Under the independent contractor safe harbor in H.R. 1956, the out-of-state retailer now has no nexus with Kansas.

Financial Services Scenario 

Kansas financial services company H breaks itself into companies I and J, 

which remain in Kansas, as well as broker K, which is located out-of-state. 

Broker K services the Kansas customers of companies I and J via Internet, mail 

or telephone. Income earned by broker K on sales of financial services to Kansas 

customers will no longer be taxable by Kansas.

Information/software Services Scenario 

A Kansas company providing information and software support services to 

businesses in Kansas and other states breaks itself into in-state information 

services company X, in-state software support services company Y, and an outof-state sales agency Z. Companies X and Y wholesale their services to agency 

Z, who in turn sells the services to businesses in Kansas, delivering the services 

via the Internet. Income earned by agency Z on sales of information and software services provided to Kansas customers will not be taxable in Kansas.

Kansas currently derives 67% of its corporate income tax revenues from the top 

125 companies in tax liability. These companies have corporate income liability in 

excess of $300,000 each, and they are generally multi-state business entities. We 

can anticipate that some types of businesses will readily benefit more from the tax 

planning opportunities in H.R. 1956 than others. Brick and mortar retailers, large 

and small, will probably not be able to reduce their nexus exposure under H.R. 

1956. Manufacturers may already utilize substantial tax incentives that reduce or 

eliminate their business tax liabilities. Without those incentive programs, however, 

manufacturers would be strongly motivated to restructure under H.R. 1956. Out-ofstate Internet businesses, and service providers that can provide at least a portion 

of their services from remote locations (or restructure themselves to do so) will obviously be interested in taking advantage of H.R. 1956. These are not the only examples—but they reflect the tax system I know best, Kansas. 

Our research says this threat to our states’ tax bases is real—not some manipulation of numbers for shock value in a public hearing. The NGA report says the tax 

loss is too large to ignore. These examples, from real companies, point out the unfairness of allowing this kind of preferential tax treatment for some businesses to 

occur, while the vast majority of retail or small businesses in your states will never 

gain this advantage. 

III. H.R. 1956 DOES GREAT DAMAGE TO OUR FEDERAL SYSTEM OF GOVERNMENT. 

H.R. 1956 runs roughshod over federalism, placing Congress in the position of imposing a smorgasbord of federally-mandated state tax exemptions that would preempt hundreds of existing state and local laws and rules. For almost 230 years, 

while maintaining its jurisdiction over interstate commerce, Congress has consistently respected the right of states to raise revenues. H.R. 1956 would overturn the 

current constitutional ‘‘doing business’’ standard for state business activity taxes. 

The ‘‘doing business’’ standard has been successfully defended in the courts of 

many states. In fact, the Supreme Court of the United States had denied certiorari

in at least two instances where a state court has upheld the ‘‘doing business’’ standard. H.R. 1956 would have the effect of reversing these state court decisions. Such 

encroachment on state tax authority clearly violates the most basic principles of federalism upon which our Nation was built. 

Conclusion 

The economy of the 21st Century is electronic and borderless. Most businesses can 

operate anywhere and anytime without the encumbrance of physical presence. Technological developments have completely reshaped the manner in which business is 

conducted. Consequently, the business that utilizes modern technology to maximize 

a state’s market may have no less of a presence in the state than the business that 

establishes a physical presence. 

That is why the current standard of economic presence, taking into account property, sales and payroll, is fair. As Professor Swain points out, ‘‘equity is enhanced 

25

by economic nexus because economic nexus ensures that similarly situated taxpayers are treated the same, both within each state and nationally.’’

H.R. 1956 takes 19th Century tax law and imposes it upon the 21st Century electronic, borderless economy. It replaces economic presence with ‘‘headquarters-only’’

taxation. It is a colonial concept of taxation wherein a company can receive the benefits a state offers without making a fair payment. 

How does a multistate company with economic presence in a state receive benefits 

that state has to offer? It benefits from an enhanced market when a state’s residents are educated by a state educational system paid for by state revenues. It benefits when it can adjudicate disputes in a state court system paid for by state revenues. It benefits when its trucks travel on that state’s roads with that state’s law 

enforcement officers keeping the road safe to transport that company’s goods. 

There is no compelling need for federal preemption of state and local law by 

switching from a system that works to a system that does not work. The Multistate 

Tax Commission, and its participating states, are always at work promoting fairness 

and uniformity. As a report from the Andrew Young School of Policy Studies at 

Georgia State University recently concluded, ‘‘To the credit of member states united 

by the Compact, the MTC has faithfully pushed the need for uniformity and cooperation against the competitive nature of states and the forceful challenge of corporate taxpayers.’’ (Hildreth, Murray, and Sjoquist, ‘‘Cooperation or Competition: 

The Multistate Tax Commission and State Corporate Tax Uniformity,’’ August, 

2005). 

Mr. Chairman, Congressman Watt, Members of the Subcommittee, thank you for 

the opportunity to present this testimony. Please do not support H.R. 1956.

Mr. CHABOT. Thank you very much. 

Mr. Williams, you are our last witness here today. 

TESTIMONY OF LYNDON D. WILLIAMS, TAX COUNSEL, 

CITIGROUP CORP. 

Mr. WILLIAMS. Thank you, Mr. Chairman and Members of the 

Subcommittee. My name is Lyndon Williams. I am tax counsel for 

Citigroup. On behalf of Citigroup, I want to thank the Subcommittee for holding this hearing today on H.R. 1956, the ‘‘Business Activity Tax Simplification Act of 2005.’’ I appreciate the opportunity to testify in support of this legislation. 

Citigroup is one of the largest financial institutions in the world 

with 140,000 employees located in the United States and nearly 

300,000 employees worldwide. Citigroup provides a diverse range of 

products and services to consumers, including banking services, 

credit cards, loans and insurance. 

I am sure you are familiar with Citi Cards, for example. Citi 

Cards is one of the leading providers of credit cards in the United 

States with close to 80 million customers. Citigroup paid hundreds 

of millions of dollars in State business activity taxes annually in 

States where we have a physical presence and significant number 

of employees. 

Unfortunately, a number of other States believe that the physical 

presence standard should not apply to them. They are seeking to 

enforce an economic nexus regime that forces a national bank to 

pay tax in States where, for example, its credit card customers reside. The fact that 100 percent of the bank’s taxable income might 

be taxed in other jurisdictions where it is physically present would 

not matter. This is precisely the circumstance in which Citigroup’s 

credit card bank finds itself. 

Citigroup’s major credit card issuer is established in South Dakota, where it employs over 3,000 South Dakota residents. It occupies buildings that exceed 425,000 square feet on 70 acres of land. 

Our employees benefit from the State school systems, the roads 

26

and bridges, the fire and police services and other municipal services. The company attributes all of its taxable income to South Dakota, but some States believe that the same income should also be 

taxed again where the bank’s credit card customers reside. 

Our customers reside in every State. Under the commerce clause, 

Congress must ensure the free flow of goods and services among 

the States. A State tax against a corporation operating through 

interstate commerce requires substantial nexus. 

The Supreme Court in Quill v. North Dakota, a case involving 

State sales and use tax collection responsibility, held a substantial 

nexus means that the out-of-State company must have physical 

presence in the taxing State. While many State courts agree with 

the Quill’s physical presence nexus standard—also applies to BAT, 

the business activity tax, some tax administrators and some State 

courts disagree. They argue that the Quill decision is limited to 

sales tax, meaning that a physical presence standard applies for 

sales tax and an economic presence standard would apply for income tax. 

This construction of the commerce clause creates a hodgepodge 

of taxing standards leading to protracted litigation at significant 

cost to taxpayers and to State tax administrators. We believe H.R. 

1956 goes a long way toward resolving these problems. The bill 

codifies the physical presence standard. A State or locality may not 

impose business activity taxes unless the business has a physical 

presence in that jurisdiction. H.R. 1956 would also modernize Public Law 86–272. 

The law prohibits States from imposing an income tax on out-ofState sellers of tangible personal property if nexus arises solely 

from solicitation of customers’ orders for goods that are approved 

and shipped from points outside the State. The U.S. economy has 

undergone significant changes in 46 years since this law was enacted. H.R. 1956 extends the long-standing protections of Public 

Law 86–272 to all sales and transactions, not just sales of tangible 

personal property. 

In conclusion, H.R. 1956 would make clear, for example, that 

Citigroup’s credit card bank is taxable in South Dakota and in all 

or all other States in which the bank has a physical presence. This 

is a far more appropriate, equitable and predictable standard for 

our business and for State revenue authorities than the tug of war 

that exists today. 

We applaud Congressman Goodlatte and Boucher for their efforts 

and their perseverance in putting forward this legislation. We ask 

this Subcommittee to move this legislation forward as soon as possible so that the business community and tax administrators in the 

States have certainty and uniformity in the imposition and collection of business activity taxes. 

Thank you. 

[The prepared statement of Mr. Williams follows:]

PREPARED STATEMENT OF LYNDON WILLIAMS

My name is Lyndon Williams and I am a tax counsel in the tax department of 

Citigroup, specializing in corporate tax issues, including state taxation issues. On 

behalf of Citigroup, I want to thank Chairman Cannon, Congressman Watt, and the 

other members of this subcommittee for holding this hearing today on H.R. 1956, 

the ‘‘Business Activity Tax Simplification Act of 2005 (BATSA).’’ I very much appreVerDate 0ct 09 2002 11:51 Jan 12, 2006 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6621 G:\WORK\COMM\092705\23640.000 HJUD1 PsN: 23640
27

ciate the opportunity to testify in support of this legislation and to discuss why the 

BATSA is so important to Citigroup and to the financial services industry in general. 

Citigroup is one of the world’s largest financial institutions, with 140,000 employees located in the United States and nearly 300,000 employees worldwide providing 

services to more than 200 million customers in all fifty states and in over 100 countries. While Citigroup engages in a variety of financial service businesses and offers 

many products and services to its customers, my primary focus today is Citigroup’s 

consumer business. In the United States, Citigroup provides a diverse range of products and services to consumers, including banking services, credit cards, loans, and 

insurance. I’m sure you are familiar with Citi Cards, for example. Citi Cards is one 

of the leading providers of credit cards in the United States with close to 80 million 

customers and 119 million accounts. Consumers spend roughly $229 billion annually 

through our credit cards, which constitutes about 2 percent of the nation’s Gross Domestic Product (GDP). 

Citigroup subsidiaries operating throughout the United States pay hundreds of 

millions of dollars in state business activity taxes, in addition to state premiums 

taxes paid by its insurance businesses, payroll taxes, real and tangible personal 

property taxes, sales and use taxes on the purchase of goods and services and other 

miscellaneous taxes. 

We believe we pay our fair share of state income taxes in those states where we 

have a significant number of employees and physical presence, and utilize the resources provided by the states in which we have these attributes. Unfortunately, as 

explained in more detail below, a number of other states believe that the physical 

presence standard should not apply. Instead, they prefer to impose business activity 

tax on companies solely because businesses provide products and services to customers in their states. This incongruity of taxing standards obviously causes a number of problems, including multiple taxation of the same income. Only Congress can 

act to provide a uniform standard that will clarify and simplify state business activity tax regimes for companies operating in interstate commerce. 

BACKGROUND

The taxable income of a multi-state corporation is generally attributable to those 

states where the company has a physical presence, such as employees, an office, and 

other tangible property. Some states have asserted that, in addition, a multi-state 

corporation must pay taxes in those states where it does not have any physical presence because some of its customers might reside in their states. Economic presence 

generally refers to situations in which an out-of-state corporation does not own or 

lease real or tangible property, and does not have employees or facilities in the taxing state, but engages in solicitation of customers within that state creating some 

minimum connection between the state and the taxpayer. 

For example, under an economic nexus regime, a national bank that issues credit 

cards to customers residing in states other than where the bank maintains offices, 

employees, or property would be forced to file tax returns and pay taxes in those 

states where it issues credit cards to customers, as well as where it has a physical 

presence. The fact that 100-percent of the bank’s taxable income might have been 

subject to taxation in the jurisdictions where it is physically located would not matter because the bank would be required to pay tax again on the same income in 

the states where its customers reside or move to, even though the bank has no physical presence in those states. 

This is precisely the circumstance in which Citigroup’s credit card bank finds 

itself. Citigroup’s major credit card issuer is incorporated in South Dakota. The company employs over 3,000 South Dakota residents, and is among the largest private 

employers in the state. It has resided in South Dakota for nearly 25 years. It occupies buildings, including offices and a daycare center, that exceed 425,000 square 

feet on 70 acres of land. Citigroup is the single largest taxpayer to the state of 

South Dakota, and the employees in South Dakota benefit from the school systems, 

the roads and bridges, the fire and police services, and other substantial services, 

infrastructure, benefits, and protections of the state. The company apportions 100-

percent of its taxable income to South Dakota. In addition, some states assert that 

the same income is subject to tax in jurisdictions where the bank’s credit card customers reside, and our credit card customers reside in every state in the nation. 

H.R. 1956 would make it clear that Citigroup’s credit card bank and similarly situated businesses are taxed where they have a physical presence. The substantial 

taxes paid by the bank to the jurisdictions where it is physically located is justified 

by the police and fire protection, the roads and bridges, the sewer and water systems, and other municipal services that the corporation and its employees enjoy. In 

28

addition, the bill would provide predictability and certainty to the bank as to what 

its tax liabilities are and to which states those tax liabilities have been rightfully 

incurred. 

SUBSTANTIAL NEXUS: PHYSICAL PRESENCE VS. ECONOMIC PRESENCE

Under the Commerce Clause of the constitution, Congress is vested with the responsibility to ensure the free flow of goods and services among the states. Thus, 

a state tax levied upon products and/or services conducted through interstate commerce meets constitutional muster only if an out-of-state corporation has ‘‘substantial nexus’’ with the taxing state. There has been much dispute and litigation over 

what is meant by ‘‘substantial nexus.’’ The U.S. Supreme Court in Quill Corp. v. 

North Dakota, 504 U.S. 298 (1992), a case involving sales and use tax collection responsibility, held that ‘‘substantial nexus’’ means that the out-of-state company 

must have some physical presence in the taxing state for the tax collection responsibility to be constitutionally valid. Many state courts have concluded that the physical presence nexus standard of Quill also applies to business activity taxes, finding 

no support in the Commerce Clause for different nexus standards depending on the 

type of tax involved. 

Yet, some state tax administrators and some state courts disagree. They have construed the Quill decision to mean, in essence, that the constitutional standard for 

taxing an out-of-state corporation depends on the type of tax being imposed. They 

argue that the Quill decision is limited to sales tax. Interpreted in this manner, the 

constitutional standard is physical presence (i.e. in-state employees, an office, property) if a sales tax is involved, and economic nexus (i.e. merely having in-sate customers) if an income tax is involved. 

This construction of the Commerce Clause produces different results not only depending on the type of tax involved but also the type of industry involved. This is 

because Public Law 86–272 prohibits states from imposing an income tax on the 

out-of-state seller of tangible property if nexus arises solely from the solicitation of 

customers’ orders for goods that are approved and shipped from points outside the 

state. Therefore, as a practical matter, the physical presence standard would control 

in the case of manufacturing. 

On the other hand, service and other significant non-manufacturing industries are 

not explicitly protected by Public Law 86–272, creating a disparity among industries 

operating in interstate commerce. 

This disparity in the taxation of activities conducted in interstate commerce may 

lead to protracted litigation at significant costs to taxpayers and state tax administrators. It has also lead to great uncertainty and unpredictability in the manner in 

which multi-state businesses are taxed and inconsistency with international standards applicable to many of these multi-national businesses. 

THE PROVISIONS OF H.R. 1956

We believe H.R. 1956 goes a long way towards solving these problems, which are 

becoming increasing vexing for companies and taxing authorities alike. 

Physical Presence Standard. H.R. 1956 codifies the physical presence standard by 

providing that a state or locality may not impose business activity taxes unless businesses have ‘‘physical presence’’ in the jurisdiction. The required physical presence 

is a bright line test that establishes tax jurisdiction where an out-of-state business 

has employees, property, or the use of third parties to perform certain activities 

within a taxing state for greater than 21 days during a taxable year. 

For instance, H.R. 1956 would permit a business to send employees into a state 

for 21-days in any year and not give rise to an obligation for that state’s income 

tax. H.R. 1956 thus would let employees perform transitory assignments and not 

trigger unintended tax obligations. Guidance on what activities a firm can conduct 

within a state that will not trigger that state’s taxing power will provide certainty 

to businesses and tax administrators and will reduce compliance and enforcement 

costs. 

H.R. 1956 attributes the physical presence of a person in the state to an out-ofstate business if that out-of-state business uses the services of the in-state person 

for more than 21 days to establish or maintain market in the state, unless the instate service provider performs functions for more than one business entity during 

the year. The ownership relationship between the out-of-state person and the instate person is irrelevant for purposes of this provision. The legislation recognizes 

that to the extent that a separate company is independently conducting business in 

a state for which it is compensated by an out-of-state entity, the economic income 

earned in the state will be subject to tax. 

29

Modernization of Public Law 86–272. The U.S. economy has undergone significant 

changes in the 46 years since Public Law 86–272 was enacted. Many of the companies, products, and services that make the U.S. economy so vibrant today were not 

even imagined when this law was enacted. Thus, H.R. 1956 extends the longstanding protections of Public Law 86–272 to all sales or transactions, not just to 

sales of tangible personal property. 

H.R. 1956 also modernizes Public Law 86–272 by addressing the efforts of some 

states to avoid the restrictions imposed by Congress in Public Law 86–272. Specifically, some states have established taxes on business activity that are measured by 

means other than the net income of the business. Two examples of these new state 

business activity taxes are the Michigan Single Business Tax, which imposes a tax 

on a company’s business activities in the state, not on net income, and the New Jersey Corporation Business Tax, which was amended in 2002 to impose a gross profits/gross receipts tax. In other words, New Jersey has effectively circumvented the 

Congressional policy underlying the enactment of Public Law 86–272 by imposing 

a non-income tax on businesses that could otherwise be protected by the Public Law. 

While other states may not enact such a targeted end-run around Public Law 86– 272, it is likely that states will increasingly turn to non-income based business activity taxes. H.R. 1956 addresses this by ensuring that Public Law 86–272 covers 

all business activity taxes, not just net income taxes. 

RELATIONSHIP TO INTERNATIONAL TAXATION

The United States and its tax treaty partners have, for decades, adopted and implemented the physical presence standard for determining the tax jurisdiction of 

multinational corporations. This standard is embodied in the ‘‘permanent establishment’’ concept, which is a long-standing principle of the U.S. tax treaty regime, and 

is part of the OECD model treaty. 

The ‘‘permanent establishment’’ rule provides that neither country that is a party 

to a bi-lateral tax treaty will impose an income tax on a business from the other 

country unless that business maintains a substantial physical presence in the taxing country. Using the U.S. Model Treaty provisions as an example, a foreign business must have a ‘‘fixed place of business [in the United States] through which the 

business of an enterprise is wholly or partly carried on’’ before the United States 

may impose a tax on that business. A fixed place of business includes a place of 

management, a branch, an office, a factory, a workshop, etc. In addition, a deemed 

permanent establishment may arise if an in-state agent (other than an agent of an 

independent status) is acting on behalf of an out of-state enterprise where the instate agent habitually exercises authority to conclude contracts that are binding on 

the out-of-state enterprise. The activities of an in-state independent agent acting in 

the ordinary course of its own business are not deemed a permanent establishment 

of the out-of-state enterprise. 

A physical presence standard places an appropriate limit on states gaining taxation powers over out-of-state firms and conforms to common sense notions of fair 

play. It is significant that the OECD has recently studied the issue and concluded 

that the ‘‘permanent establishment’’ rule should remain the proper standard for 

international tax treaties even with the proliferation of electronic commerce. The 

policy reasons underlying such a conclusion are clear in maintaining the free flow 

of commerce among trading partners. 

CONCLUSION

Congress has a responsibility under the Commerce Clause to provide a uniform 

standard under which multi-state companies are taxed by different states. H.R. 

1956 would codify the physical presence nexus standard. The bill would make it 

clear, for example, that Citigroup’s credit card bank is taxable in South Dakota and 

in any other state in which the bank establishes a physical presence. This is a far 

more appropriate, equitable, and predictable standard for our business and for state 

revenue authorities than the tug of war that exists today. 

H.R. 1956 describes minimum levels of activity that a business could conduct in 

a state and not trigger liability for tax in that state. Clear guidance on what activities a company can conduct within a state that will not trigger that state’s taxing 

power will provide certainty to businesses and tax administrators and will reduce 

compliance and enforcement costs. BATSA also would bring Public Law 86–272 up 

to date to reflect an economy that has changed dramatically since 1959, thus treating products and services offered by all businesses in a fair and equitable manner. 

Versions of H.R. 1956 have been introduced in the last several Congresses, and 

we applaud Congressmen Bob Goodlatte and Rick Boucher for their perseverance 

in this effort. In the meantime, a number of states have taken aggressive action to 

30

tax companies like Citigroup based on the economic activities of its customers rather 

than the physical presence of its employees and its businesses, creating a hodgepodge of taxing standards and an increased tax and compliance burden for companies that serve customers nationwide. We ask this subcommittee to move this legislation forward as soon as possible so that we in the business community and tax 

administrators in the states have certainty and uniformity in the imposition and collection of state business activity taxes.

Mr. CHABOT. Thank you very much, Mr. Williams. 

I would like to commend all four witnesses, actually, for coming 

in right on time at the 5 minutes. It is quite impressive. It takes 

hard work to get it down to 5 minutes. Some people ignore it. So 

I really want to commend you for doing that and for the excellent 

testimony you gave. 

Members of this panel will now have 5 minutes to ask questions, 

and I recognize myself for 5 minutes for this purpose. Let me start 

with you if I can, Mr. Horne. Is the current State taxation and taxing situation such that many small businesses fear for the viability 

of their businesses. 

Mr. HORNE. I think the main problem today is that small businesses are unaware of the environment in which they operate. We 

are naive. We had no idea of this problem until we were trapped 

by New Jersey. But it is a very, very frightening environment once 

you are trapped. And I had one young woman victim from another 

State, actually, Mr. Goodlatte’s State. She tracked me down and 

called me. She was in tears, so desperate for help, to try to learn 

how to deal with this nightmare. So, I mean, I don’t know what 

else to say. 

Mr. CHABOT. Thank you. Let me turn to you, Representative 

Ehrhart, now. In your opinion, what do you think would happen if 

Congress does not act and does not enact H.R. 1956 or similar legislation? Do you foresee a problem with States asserting greater 

taxation authority over companies with even less of a connection in 

a State than those that are taxed now? 

Mr. EHRHART. I think with a new economy certainly you will. 

Those who have the proclivity to seek out anything that moves, 

taxing whatever they may be able to get their hands on, or they 

will be taxing our memory very soon—not to be flippant, Mr. Chairman—but I think you are going to find just across the board, if 

Congress doesn’t act, you are going to find States getting more and 

more aggressive. You are going to have local municipalities and 

maybe county governments, who take this as almost carte blanche 

to begin to tax, based on whatever type of direct tax they can apply 

to an out-of-State, out-of-area business. 

With the new economy, we are just going to bring the bad old 

tax laws into the new economy. I just think that is bad policy. We 

in Georgia have tried to stay away from that. We stay with the 

basic nexus under Public Law 86–272. 

Mr. CHABOT. Thank you very much. Secretary Wagnon, let me 

ask you, if I can now, what is your response to stories from companies such as ProHelp Systems here, in 

Mr. Horne’s case, or Smithfield Foods, whose deliveries are being 

stopped at the roadside and whose businesses are being severely 

disrupted by States demanding payment for BATs? Shouldn’t there 

be a reasonable standard for such companies? 

31

Ms. WAGNON. I guess my response is threefold—and I don’t wish 

to be flippant, but I would like Mr. Horne to come to Kansas. We 

don’t treat our small business people like that. He can certainly 

sell his goods and services there. We have an exclusion, a de minimis standard in our franchise tax, so he would fall under that de 

minimis standard and wouldn’t even be taxed. 

I guess in a broader sense I spend a lot of time in the Kansas 

legislature working with NFIB, and I have not heard a single story 

similar to the one that I have heard from him in any other complaints. They are far more concerned about property taxes and 

some other things like that. 

I guess finally, I would say, I think small business is really going 

to be the loser in all of this, if we allow the very large multistate 

corporations to develop a lot of nowhere income or to shift their income in such ways that States are faced with this huge loss. You 

look at what NGA has proposed in their study and at $6.6 billion 

of State tax revenues that will be lost. 

Well, you all know that we are not going to cut $6.6 billion worth 

of services, and so that burden is going to fall back onto the taxpayers that probably have fewer tax planning resources, sub-S corporations, individual income tax, property tax, sales tax. So I think 

it is a very bad move to push that burden back onto the very people that he is trying to help. 

Mr. CHABOT. Thank you. Mr. Williams, how would H.R. 1956, the 

bill that we are considering here, the Goodlatte bill, create tax certainty for businesses? 

Mr. WILLIAMS. Well, it creates tax certainty because it establishes one standard, one standard for businesses, whether small or 

large businesses, that operate in interstate commerce, and that 

standard would be physical presence. It would be a clear standard, 

and it would be a standard that is predictable and certainty would 

be clear from that standard. 

Mr. CHABOT. Thank you very much. I have only got 8 seconds 

left. So rather than ask another question, I will give back my time, 

and I will yield to the gentleman from Massachusetts, Mr. 

Delahunt, for 5 minutes. 

Mr. DELAHUNT. Yes. Thank you, Mr. Chairman. This is a thorny 

issue, as I said in the opening statement, I think there are arguments to be made on each side. I think that the example put forth 

by Mr. Horne is—I thought you responded well to that. I would 

suggest that possibly this Congress could consider a small business 

exemption to deal with the problem presented by Mr. Horne, so 

that small businesses would be protected. 

At the same time, I have huge concerns about the revenue that 

is necessary for the local and State governments. Now, I am sure 

that there are some that don’t believe that local and State governments should even impose taxes, but I think we have seen, particularly recently in the aftermath of the natural disasters that occurred in the Gulf States, that it doesn’t work, it is unrealistic. 

And yet at the same time I think there’s a consensus that we are 

in a new economy, and we have to be creative, and we should do 

some thinking out of the box, so to speak. But what I find frustrating is that doesn’t appear to be happening. What we are hearing now are the same arguments presented. Can anyone tell me 

32

whether there is any discussion going on about presenting a consensus to the Congress in terms of creating an articulable standard, other than physical presence, that would be satisfactory to the 

business community and at the same time satisfactory to the local 

and State jurisdictions that so badly need some revenue? 

Ms. WAGNON. I would be happy to take a shot at answering your 

question, sir, if that would be appropriate. 

Mr. DELAHUNT. Is there somewhere, some file that I can have 

some confidence in? 

Ms. WAGNON. A little bit. For the last 5 years the States have 

gotten together in a remarkable effort to try to organize the 

streamline sales tax. 

Mr. DELAHUNT. I am very familiar with it. 

Ms. WAGNON. I have been right in the middle of that, as many 

of us have. It has taken a huge amount of energy. But that kind 

of organization, where States come together, design a solution, in 

concert with business, is the appropriate way for that to happen. 

The Multistate Tax Commission, which has also been a partner in 

the streamline sales tax, has been working on a factor presence, 

nexus standard, for economic nexus, that would take into account 

the realities. It also has that $500,000 de minimis standard that 

you referred to, which totally solves Mr. Horne’s problems. 

I think if we leave this hearing and determine that streamline 

is now up and running, and this may be the next area where we 

turn our attention, that may be a good idea. 

Mr. DELAHUNT. I would really encourage that. Representative. 

Mr. EHRHART. Congressman Delahunt, one of the pieces being 

left out of that particular equation, and you certainly have taken 

into consideration in your remarks, is what do the people of this 

country think and what do they want for their new economy, because they are the participatory part of that. And every sampling 

of public opinion, especially with respect to SSTP, has been that 

they don’t want to move toward taxing that the way it was—the 

way other goods and services have been taxed. The people do feel 

like the tax bill burden on themselves and even on their businesses 

obviously is too large. We should move towards—and I think 1956 

does that with their de minimis standards. It really doesn’t get outside the nexus that we have. 

Mr. DELAHUNT. I hear what you’re saying, but let me just read 

the conclusion of the Congressional Research Service, which is a 

branch of the Library of Congress, in its analysis of H.R. 1956. 

‘‘The new regulations as proposed in H.R. 1956 would have exacerbated underlying inefficiencies because the threshold for businesses, the 21-day rule, higher than currently exists in most 

States, would increase opportunities for tax planning leading to 

more income. In addition, expanding the number of transactions 

that are covered by P.L. 86–272 also expands the opportunity for 

tax planning, and thus tax avoidance and possibly evasion.’’

I know there’s no easy answer here, but this is a nonpartisan, 

independent agency. 

I see the red light is on. 

Mr. CHABOT. The gentleman’s time has expired. If you’d like to 

respond briefly. 

33

Mr. EHRHART. Just very quickly. I also read that particular report, and the part that was relevant to me was that it says, as a 

result, BATs actually provides States with more opportunity to tax 

interstate commerce than would be available under the ALEC majority report recommendation. So it seems to take both sides of the 

issue even there, which is generally the case in many of these 

things. 

Mr. CHABOT. The gentleman’s time has expired. 

The gentleman from North Carolina Mr. Coble is recognized. 

Mr. COBLE. Thank you, Mr. Chairman. 

Mr. Chairman, as you accurately pointed out, we have a distinguished panel, and I thank you all for being here, as the Chairman 

indicated. 

Ms. Wagnon, when I indicated at the outset that tax collectors 

grab every thin dime that’s not nailed down, I didn’t mean that 

against you personally. I was acknowledging the fact that county 

and tax collectors have a job to do, and they should lawfully grab 

every thin dime that’s not nailed down. But I am confident, folks, 

that there are some taxing authorities or jurisdictions that have 

unfairly and/or overly aggressively sought payment of business activity taxes without basis. Do you all agree with that generally. 

Mr. HORNE. I certainly do. 

Mr. COBLE. Having said that, if we don’t pass or enact 1956, Secretary Wagnon, how would you address that problem of overaggressiveness or unfair solicitation? 

Ms. WAGNON. Well, I didn’t respond to your question about did 

I agree with you because I’m not so knowledgeable about every 

State. I’m not aware that States are exceeding laws that are legitimately passed by their own State legislatures. I think tax departments do collect that which is due and owing because that’s their 

job, but they collect them under laws that the legislature has allowed them to do. And so the question then becomes are some 

States’ laws more aggressive than others. What the Multistate Tax 

Commission is trying to do is to get to that standard of uniform 

laws that we can recommend for all States that balances that fairness. 

Mr. COBLE. My time is running. I drew my conclusion based 

upon the testimony that we heard here this afternoon regarding 

the overaggressiveness. 

Let me talk to my friend from Georgia. 

Ms. WAGNON. Certainly. 

Mr. COBLE. I assume, Mr. Ehrhart, that you would agree that—

well, strike that. I shouldn’t insert words into your mouth. Do you 

agree that in some cases challenging assessments through State 

courts is unfair to out-of-State businesses? 

Mr. EHRHART. Certainly it is, because especially under the commerce clause, and then you go back to Quill, our previous precedent, you have the situation where business is at least entitled to 

the same treatment in every court in every State. You can’t set up 

a different standard in each State. That would be completely unjust. 

Mr. COBLE. I’m inclined to agree with that, too. But let me ask 

you this, Mr. Ehrhart, any of you, would you all support making 

Federal courts available to hear State assessment cases? That may 

34

be a slippery slope that we may be approaching. I’m not suggesting 

that I endorse that, but I’d be glad to hear what you all think to 

that. 

Ms. WAGNON. No. 

Mr. COBLE. Mr. Williams. 

I didn’t mean to cut you off, Mr. Ehrhart. 

Mr. EHRHART. I was going to state I thought Quill was very eloquent with respect to the physical presence standard. I think that’s 

applicable here and in SSTP. 

Mr. COBLE. Mr. Williams. 

Mr. WILLIAMS. This is an issue involving in the Constitution, and 

clearly the availability of the judiciary is very important at all levels, and if Federal courts were available, I believe that that would 

be another avenue for businesses to have redress to these issues 

that are very important to the U.S. Economy as well as to businesses navigating in interstate commerce. 

Mr. COBLE. Mr. Horne. 

Mr. HORNE. I would certainly like to be able to deal with New 

Jersey with a South Carolina lawyer in South Carolina in Federal 

court as opposed to a New Jersey lawyer in a New Jersey court. 

Mr. COBLE. Ms. Secretary, you want to be heard as well? 

Ms. WAGNON. If I might expand upon my answer. These cases 

and the misunderstanding that exists about what Quill did or did 

not say about substantial nexus are making their way through the 

court systems right now. The Lanco case is on appeal; the ANF 

case is being appealed to the United States Supreme Court. To bypass a State court on a issue of State law, I believe, is a constitutional problem. 

Mr. COBLE. Mr. Chairman, knowing of your affinity for beating 

the red light, I yield back my time. 

Mr. CHABOT. I appreciate the gentleman yielding back. 

The gentleman from Arizona Mr. Franks is recognized for 5 minutes. 

Mr. FRANKS. Thank you, Mr. Chairman. 

I understand I have a little different type of microphone up here. 

So everyone can hear me? 

I know, Mr. Horne, that a lot of times these kinds of concerns 

from Congress come only after a great deal has already happened 

at the State level, but there’s been just a trend in the testimony 

with most of the members of the panel today that it seems that the 

States are becoming more aggressive in asserting the authority to 

impose business activity taxes. Do you agree with that statement? 

Is it a recent phenomenon; is it something you see as an escalating 

issue? 

Mr. HORNE. I think it’s a growing phenomenon, and I’ve got some 

examples if you’d like me to cite them for you. 

Mr. FRANKS. Do you think it’s something becoming pervasive, 

and they see this as a new idea, and they think this is a way 

to——

Mr. HORNE. Absolutely, absolutely. 

Mr. FRANKS. Mr. Ehrhart, probably the most compelling part of 

Ms. Wagnon’s testimony to me was the assertion that there was a 

10th amendment or States rights issue here, or constitutional 

35

issue. Can you tell me if you think that 1956 infringes on State 

sovereignty? 

Mr. EHRHART. I think it’s exactly the opposite. I think it protects 

the federalist principles, and ALEC, being a federalist-based organization, it stands the world on the head. Obviously there’s always 

been a tension between the commerce clause and the basic 10th 

amendment provisions, but the practical realities of that have withstood the test of time with precedent after precedent being set in 

statute and in Supreme Court precedent with respect to—you can’t 

have an impractical—every State taxation that’s different for every 

company. I mean, it would become an amazing hodgepodge of every 

jurisdiction. You could not spend enough money as a small business to begin to understand the tax policy in all 50 States and 

every county in every State, and that’s the practical reality. How 

are you going to get to that point? It’s like the only intangible tax 

we used to have in Georgia, took 8 years to get rid of it. It’s one 

of those taxes that costs more to administer than it brought in. 

This is the same kind of thing. It’s going to take States huge 

amounts of legal time and effort to track this down. It’s going to 

be more expensive to administer than it is to—actually how much 

money they bring in. So I don’t think there’s any tension at all; I 

think this is the federalist position, one we take. 

Mr. FRANKS. Ms. Wagnon, I have to be fair and give you a chance 

at that. Let me ask you if I could ask you to also include in your 

answer, Mr. Ehrhart testified that 1956 will foster economic growth 

and job creation in the States because businesses will have a little 

better idea of what their capital risks are or their capital associated with taxation is. And I know that in Arizona that is true. We 

have taken into consideration every way that we can the impact of 

our tax code upon businesses coming into Arizona in just about any 

form. It has resulted in a broadening of the tax base and an increase in the revenues. And so I guess I throw a couple of those 

things related to the sovereignty and economic growth that this 

may create in the States. 

Ms. WAGNON. I’m joined in my opinion that this is a threat to 

State sovereignty by the National Governors Association and the 

National Conference of State Legislatures, Federation of Tax Administrators, and the Multistate Tax Commission. So I’m not alone 

in that opinion. And we do believe that Congress has done a good 

job of staying out of the States’ business while protecting interstate 

commerce. 

With respect to economic development, we sit in our legislature, 

and I know other States as well sit in their legislatures, every day 

in session and try to figure out ways to remain competitive as we 

compete with each other for the best companies and for the best 

way to do business. States are far more in danger these days of giving away too much of their tax base in order to be competitive than 

to be out being a threat to business, looking for ways just to raise 

their taxes. And so I think we need to be careful in this debate not 

to characterize States as the villain or business as the villain. I 

think we need to just recognize that the changing in economy is 

looking for balance, and this bill does not provide that balance. 

Mr. FRANKS. Mr. Williams, I think I may have one more question 

here in my time. The physical presence nexus, do you believe that 

36

that is the appropriate standard for business activity taxes, and 

tell me why, what is your rationale for that, and just give us a little insight on what other possible criteria there might be. 

Mr. WILLIAMS. Thank you, Congressman. 

Yes, I do, I believe the physical presence standard is the proper 

standard that should apply. Most of the arguments that have been 

made, including the revenue projections that have been made, 

labor under an assumption of what’s called tax sheltering, which 

we’ve heard here. But States do have tools, they do have an arsenal 

of tools that’s within State laws and that can be created within 

State laws to address those issues. And we haven’t heard an argument as to why those State laws are not sufficient to address the 

concerns that have been raised in opposition to this bill, but I must 

say that the issue of whether or not a business is able to conduct 

activities in interstate commerce is a unique issue that Congress 

must focus upon, because States do have individual competing interests in terms of their own budget and revenue concerns. And we 

believe that the physical presence standard provides certainty, predictability, and allows all business to pay taxes where they are located and where they receive benefits and protection. 

Mr. FRANKS. Well said. 

I yield back. 

Mr. CHABOT. Thank you. The gentleman’s time has expired. 

The gentleman from Maryland Mr. Van Hollen is recognized for 

5 minutes. 

Mr. VAN HOLLEN. Thank you, Mr. Chairman. I thank the witnesses. I apologize for being late. I didn’t have an opportunity to 

hear your testimony. I’ve been trying to look through it and listen 

carefully to the questions. 

Just with respect to whether or not States are being more aggressive in terms of trying to collect these taxes, I think it’s important that we probably try and get CRS or somebody to take a look 

at that. As I understand what CRS has written, at least in the materials we’ve got, is that State tax collections from corporate incomes taxes have decreased recently. Now, that can be a combination of factors, people can lower tax rates, but it doesn’t appear 

anyway that they’re making up in a big way by being overly aggressive, at least on a uniform basis. Obviously you can look at individual States. 

Let me just make sure, I want to understand Representative 

Ehrhart. Now you’re here testifying on behalf of yourself as a representative of the Georgia State Legislature. 

Mr. EHRHART. On behalf of 2,400 members of the ALEC organization, a bipartisan group of legislators, as chairman of the organization, and as I myself. 

Mr. VAN HOLLEN. Has the Georgia State Legislature, the house 

or State senate taken a position on this legislation? 

Mr. EHRHART. Not specifically to the legislation, but what we do 

is we stick with Public Law 86–272. I spoke with our revenue commissioner and his staff before I came up here, and we create the 

nexus and standards, and it’s basically physical presence that was 

done under the congressional act in 1959. 

37

Mr. VAN HOLLEN. Has the State of Georgia, the legislature in 

Georgia as it’s represented through NCSL, has the State legislature voiced an opinion? 

Mr. EHRHART. Not on the NCSL provisions. Most of the members 

in Georgia belong to both organizations, as a matter of fact. 

Mr. VAN HOLLEN. But NCSL, you’re aware, is opposed to this 

legislation. 

Mr. EHRHART. We tend to generally take different positions on 

tax policy. 

Mr. VAN HOLLEN. As well with the National Governors Association? 

Mr. EHRHART. We’re generally more in line with them. In this instance they are. 

Mr. VAN HOLLEN. In this case you’re on the opposite side. 

I guess we’ve talked about the 10th amendment issue, and obviously there are differences of opinion, but it seems to me that those 

two organizations, NGA and NCSL, are certainly as protective of 

States rights, especially when it comes to these areas, as other organizations. You don’t think that they’re a good custodian of State 

rights? 

Mr. EHRHART. No, I would not, not on 10th amendment issues, 

no, sir. 

Mr. VAN HOLLEN. Is it your testimony that—let me ask you this: 

Taking the State of Georgia, is this going to lead to a net increase 

or decrease, or will it be neutral because of the way you currently 

collect? 

Mr. EHRHART. I would expect it would be a net increase for the 

State of Georgia if 1956 passes because of the economic development side. Businesses will have some certainty, and that is that 

type of economic theory that if you make it attractive for business 

to do business, they will create more revenue and more productive 

capacity. 

Mr. VAN HOLLEN. Are their any analyses that have been done in 

the State of Georgia as to whether this would be a net gain or loss 

for the State of Georgia? 

Mr. EHRHART. Not at this time. 

Mr. VAN HOLLEN. So you’re speculating then based on the perceived business development. I just want to understand what the 

basis of the answer is. 

Mr. EHRHART. Based on the philosophical premise of the ALEC 

organization. 

Mr. VAN HOLLEN. Let me ask you, Ms. Wagnon, what was the 

number you gave for what—your projected net loss? 

Ms. WAGNON. In Kansas, 25 million. 

Mr. VAN HOLLEN. Do you have a figure, an estimate from NCSL 

or elsewhere, as to what the aggregate loss in State revenue would 

be? 

Ms. WAGNON. For all the States, $6.6 billion. 

Mr. VAN HOLLEN. $6.6 billion. 

I understand, Mr. Ehrhart, you believe it’s just the opposite; that 

because of the economic development potential, you’re actually 

going to gain revenues. 

Mr. EHRHART. There are two sides. They’re still at war. 

38

Mr. VAN HOLLEN. Let me just say in closing, this obviously, as 

has been said, it’s an issue where I think that we should be able 

to come up with a reasonable approach and a bipartisan approach 

on this issue. Obviously you want some predictability if you’re a 

business as to whether or not if you engage in certain kinds of economic transactions with the State, whether you’re going to be subject to their corporate income tax. On the other hand, clearly it 

seems to me there are some, clearly many, cases where people are 

clearly engaged in enterprises and business within a State even 

though they’re not physically present in a State, and seems to me 

that too narrow a test doesn’t allow that State to recoup what I 

think would be its share of various costs from businesses doing 

transactions in the State. So I just associate my remarks with Congressman Delahunt and some of the points he made. I think that 

there is room, and the Chairman and others, that we can work 

something out. Thank you very much. 

Mr. CHABOT. Thank you. The gentleman’s time is expired. 

We’re going to go to a second round, but the Members have 

agreed we’re going to reduce our 5 minutes down to 3 just for a 

little wrap-up here, and I’ll yield myself 3 minutes at this time. 

Mr. Horne, let me go to you first, if I can. Getting back to your 

specific case, could you tell us again what was the tax that was 

being imposed upon you; and secondly, what are the expenses that 

you have incurred thus far as a result of New Jersey’s attempt to 

get this tax from you? 

Mr. HORNE. If I understand your question correctly, the tax New 

Jersey was applying to us was a business activity tax in the form 

of a minimum tax. New Jersey has a minimum tax of $500. In our 

case, if you use the calculated tax with New Jersey rates, in our 

best year, if I recall correctly, our tax was, I think, $0.83. That 

quickly escalates to $500, plus the requirement to register our company in the State; therefore, it’s basically $600 per year in order 

to sell anything in that State. That’s the way their income tax form 

reads. 

Mr. CHABOT. How much have you spent thus far as a result of, 

approximately, trying to battle this thing? 

Mr. HORNE. In terms of legal fees, I think we’re somewhere in 

the area of $3-, $4-, $5,000. I don’t recall the exact number. We’ve 

tried to keep the fees down as much as we can. Our attorney did 

give us a favorable rate. But far more important than the legal fees 

was the impact on our business. It took us, my wife and myself, 

approximately 100 hours of our time to come up with the fact that 

we’d only sold seven licenses in the State of New Jersey. As a small 

business we do not keep records by State. We had no choice other 

than to go through individual pieces of paper for the last 7 years 

in order to identify the fact that we’d only sold seven licenses, consisting of a total—with associated services, I think the number was 

$6,133 over a 6-year period, and 3 of those years the numbers were 

zero. In one it was $49. It took us about 100 hours of time to come 

up with those numbers. 

Mr. CHABOT. Thank you. 

Rather than ask another question, my time is ready to expire, so 

I’ll yield back. 

The gentleman from Massachusetts is recognized for 3 minutes. 

39

Mr. DELAHUNT. I want to just make a comment. I agree with 

you, Madam Secretary, and I disagree with you, Representative. I 

think the States can really sit down and hammer out a simplified, 

coherent system that addresses this problem. I think they’ve already done that dealing with the SSTP. And I would encourage you 

to do it. 

I said this at the last hearing: This is going nowhere, okay? Some 

might believe that it’s going somewhere, but it will not pass, and 

I think it’s important that we all work together to make it happen. 

The case presented by Mr. Horne, I think, is an egregious example. We support you, Mr. Horne, and it’s got to be addressed. At 

the same time, economic activity should be implicated into a fair 

and equitable formula. 

Mr. Williams, which of those States that you alluded to that 

don’t embrace the physical nexus standard—give me two or three 

quickly. 

Mr. WILLIAMS. Sure. Tennessee, Massachusetts, and Indiana. 

Mr. DELAHUNT. Let’s take Massachusetts, for example. What is 

the revenue that is generated by Citibank in South Dakota? 

Mr. WILLIAMS. Well——

Mr. DELAHUNT. If you know. 

Mr. WILLIAMS. I don’t know what the actual revenues that are 

generated by Citibank in South Dakota. 

Mr. DELAHUNT. Do you know what they are in Massachusetts? 

Mr. WILLIAMS. I don’t have the actual numbers with me. 

Mr. DELAHUNT. Would you agree with me that the business activity, economic activity, the profits to the bottom line generated in 

Massachusetts are substantially greater than those generated in 

South Dakota? 

Mr. WILLIAMS. I’m not an economist, but I could not——

Mr. DELAHUNT. How many people live in South Dakota? Do you 

know? 

Mr. WILLIAMS. I understand your question, but I want to make 

sure you understand this also, that—— Mr. DELAHUNT. I want you to answer my question. That’s the 

game that we play here. 

Mr. WILLIAMS. Sure. 

Mr. DELAHUNT. You can answer my question. 

Mr. WILLIAMS. I don’t know how many people live in Massachusetts, nor do I know—— Mr. DELAHUNT. Six million. I know that there aren’t 6 million 

people in South Dakota. I daresay that there is significantly more 

economic activity and profit resulting from—resulting to Citigroup 

as a result of economic activity in Massachusetts. 

What I’m suggesting to you—and I understand you represent a 

corporation, and your responsibility is to make as much profit as 

possible. And that’s good; that’s our system. But those of us that 

are here as policymakers and you’re asking us to do something 

have a much more expansive, broad responsibility in terms of public policy. Taxation is about public policy, and what we want to do 

is work on—work together to see whether we can achieve a fair 

and equitable solution so that no State is disadvantaged and that 

no business is disadvantaged. 

Mr. CHABOT. The gentleman’s time has expired. 

40

The gentleman from Arizona is recognized for 3 minutes. 

Mr. FRANKS. Mr. Chairman, thank you. 

It occurs to me that we wouldn’t be having this debate if it 

weren’t for the fact that this is interstate commerce. I mean, there 

has to be, and that should be considered very strongly on any sovereignty argument, and it also occurs to me that the States will be 

the first ones to be grateful for the clarity that this represents, because I think it will end up being something that will foster the 

economic growth in those States and ultimately affect their bottom 

line revenue in a favorable way. That’s a perspective that I have 

on that. 

But, given that, Mr. Williams, why should the Public Law 86–

272 be modernized. There’s a reason; you understand I’m asking 

you this for a reason. It seems that New Jersey especially has kind 

of undermined the will of Congress in that legislation, pretty clearly, and how would 1956 solve this circumventing of that public 

law? Can you give us a little insight on that? 

Mr. WILLIAMS. Well, the way that New Jersey actually changed 

their law—the 86–272 was intended to address business activity 

taxes. The statute, I believe, says net income taxes. So what has 

happened is that States like New Jersey have changed the tax to 

something that is not called a net income tax, another base, and 

on that basis assert that Public Law 86–272 would not apply just 

by changing the type of tax that’s being assessed. 

We believe that the modernization of Public Law 86–272 would, 

first of all, address that issue. It would make sure that all taxes 

related to business activity regardless of how they are called would 

be within the scope of Public Law 86–272. In addition to that, we 

would not have conflicting standards for one type of industry 

versus another, where for manufacturers you have one type of—you 

have Public Law 86–272; a nonmanufacturing industry, which is a 

significant portion of the U.S. Economy, are not protected by this 

statute. We believe the modernization would allow for a level playing field and would allow businesses to conduct interstate commerce in a smooth and efficient way. 

Mr. FRANKS. Thank you, Mr. Williams. 

Mr. Chairman, I guess I would just suggest here in closing that 

our economy doesn’t work just on competition, it works on a framework of trust and a framework of predictability among business 

leaders and those that are involved in business. And for us to be 

able to present that clear framework for them is, in my judgment, 

going to be a positive thing for the economy across the board and 

certainly will ultimately, as I say, favor the States in their revenue 

collection because it would broaden the base we collect. Sometimes 

we forget it’s all about productivity, and we get so caught up in 

some of the nomenclature, that productivity is the bottom line, and 

I think this is the primary reason for such a bill. 

Mr. CHABOT. The gentleman’s time has expired. 

Before we recognize the gentleman from Maryland, I’d ask unanimous consent to enter into the record some documents submitted 

by the gentleman from Massachusetts and the accompanying documents. Without objection, so ordered. 

[The information referred to can be found in the Appendix.] 

41

Mr. CHABOT. The gentleman from Maryland Mr. Van Hollen is 

recognized for 3 minutes. 

Mr. VAN HOLLEN. Thank you, Mr. Chairman. I’m not going to 

take up all of that time, but since I last asked the question, Mr. 

Ehrhart, I came across some documentation that says that the 

Georgia Department of Revenue recently reported the passage of 

this bill would reduce State revenue by $30.9 million. Are you familiar with that State Department of Georgia Revenue estimate? 

Mr. EHRHART. I’m not familiar with that, no, sir. 

Mr. VAN HOLLEN. I think as we discuss this and the impact of 

this legislation, it’s important to have facts and analyses and the 

basis for analyses and the basis for economic projections. We’ve got 

a swing here from a $6 billion loss to the States, and apparently, 

according to the Georgia Department of Revenue, including a $30.9 

million loss to the Georgia, to a projection really, as far as I understand, based on an assumption that it’s going to be a net revenue 

producer. 

What would be very helpful if we really are going to go down this 

road is to get the economic analyses that shows exactly how, if your 

contention is this is going to add revenue to States, just to show 

how you get there and come up with a number that you project 

based on that analysis. Apparently I think that the States, the individual States—and I know NCSL and NGA have done a number 

of analyses, and they base it on certain assumptions, and we’ll 

have to take a look at the reasonableness of those assumptions, but 

at least they have an analysis. 

So I would welcome you to present this Committee a hard analysis of how it is that you think this change in law will increase revenue and exactly what you project it to be. 

Mr. EHRHART. I’ll be more than happy to do that. 

Also, with respect to the Department of Revenue and their assumptions, as Mr. Delahunt did point out, we are the policymakers 

in our respective areas, and fortunately so, because generally the 

assumptions of State agencies don’t always pan out. 

I’m looking forward to being able to provide you with those costbenefit analyses because those assumptions, I would be more than 

willing to stipulate, are based on one side of the equation and don’t 

take into account the others. But I’m looking forward to presenting 

you with the other side and the overall balance. 

Mr. VAN HOLLEN. I would like that because my experience—I 

was in the State Legislature of Maryland for 12 years, and we had 

a Department of Physical Services, actually did a very good job, 

and whose analyses were always closer to the mark with respect 

to the physical impact of legislation than the individual legislators, 

on both sides of the aisle, because they were drawn from a professional cadre of people who tried to look at the facts rather than just 

the ideology, again on both sides of the aisle. So I would welcome 

an analysis that shows that. 

Thank you, Mr. Chairman. 

Mr. CHABOT. Gentleman yield back? The gentleman’s time has 

expired. 

I want to thank the panel for their excellent testimony here this 

afternoon. Each and every one, I think, has done a very good job. 

42

If there’s no further matters coming before this Committee, we’re 

adjourned. Thank you. 

[Whereupon, at 2:30 p.m., the Subcommittee was adjourned.] 

(43)

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

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RESPONSE TO POST-HEARING QUESTIONS FROM CAREY J. ‘‘BO’’ HORNE, PRESIDENT, 

PROHELP SYSTEMS, INC.


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SUPPORTING COMMENTS FOR H.R. 1956, THE ‘‘BUSINESS ACTIVITY TAX SIMPLIFICATION ACT OF 2005,’’ FROM CAREY J. ‘‘BO’’ HORNE, PRESIDENT, PROHELP SYSTEMS, 

INC.


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RESPONSE TO POST-HEARING QUESTIONS FROM LYNDON D. WILLIAMS, TAX COUNSEL, 

CITIGROUP CORP.


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PREPARED STATEMENT OF THE AMERICAN BANKERS ASSOCIATION

The American Bankers Association (ABA) appreciates the opportunity to comment 

to the House Judiciary Subcommittee on Commercial and Administrative Law on 

H.R. 1956, the Business Activity Simplification Act, which ABA strongly supports. 

ABA, on behalf of the more than two million men and women who work in the 

nation’s banks, brings together all categories of banking institutions to best represent the interests of this rapidly changing industry. Its membership—which includes community, regional and money center banks and holding companies, as well 

as savings associations, trust companies and savings banks—makes ABA the largest 

banking trade association in the country. 

H.R. 1956 would apply a uniform standard to an emerging multiplicity of state 

taxation laws affecting businesses that offer services or products in more than one 

state. An increasing number of states have passed or are considering passing legislation lowering the threshold of what constitutes a ‘‘substantial nexus’’ of business 

activity. Each state defines and applies their own nexus to determine when a business operating from another state is required to pay income tax in their state. Some 

state legislatures have concluded that just one customer residing in their state 

should count as a sufficient nexus for them to apply business income tax to a business operating from another state. 

H.R. 1956 would codify in federal law that an actual physical presence in a state 

is required to create a substantial nexus. H.R. 1956 also includes a bright-line test 

that would establish a minimal amount of activity a business must perform in a 

state before it is subject to income taxes and additional paperwork. 

Clearly, additional taxes cost businesses revenue they could otherwise invest in 

employees, innovation, or to better serve their customers. However, inconsistent 

standards adopted by multiple states compound the problem by creating business 

uncertainty, increasing litigation costs, and driving up compliance costs. HR 1956 

would reduce these compliance and legal costs, and provide the certainty that the 

financial services industry needs to operate efficiently. It is also important to note 

that many smaller companies, such as community banks, do not possess the substantial resources required to comply with a proliferation of disparate state tax laws 

and as a result suffer disproportionately. There are more than 3,200 banks and 

thrifts with fewer than 25 employees; nearly 1,000 banks and thrifts have fewer 

than 10 employees. Many of these community banks operate near state borders and 

serve customers from more than one state. 

Without business certainty, financial service providers are forced to offer fewer 

products at higher costs. Financial service providers might also cease doing business 

in those states where additional tax burdens exist. Therefore, states that aggressively tax out-of-state businesses could have the effect of reducing choices available 

to consumers in those states. Reduced competition would restrict consumer access 

to credit and increase credit costs in those states, which could have even broader 

negative effects on individual state’s economies and, possibly, the economy of a larger region. 

For example, almost all large consumer purchases (e.g., cars, homes, boats, etc.) 

are accomplished through the use of loans. A growing number of everyday purchases 

are performed with credit cards. Many of these services are offered by banks located 

outside of one’s home state or by banks located in multiple states. Healthy national 

competition for customers ensures that customers receive the highest quality products at the best prices. But when banks or credit card companies discontinue or restrict their services to a particular state, local consumers and citizens have fewer 

options for obtaining credit and less access to innovative products. This depresses 

economic growth and ultimately hurts the state tax receipts of business actually located within the affected jurisdiction. 

ABA is grateful to Congressman Goodelatte and Congressman Boucher for re-introducing the Business Activity Simplification Act in the 109th Congress and Chairman Cannon for holding a hearing on this important legislation. We look forward 

to working with the Committee on this important legislation.

53

PREPARED STATEMENTS OF MICHAEL MAZEROV, SENIOR FELLOW, ON BEHALF OF THE

CENTER ON BUDGET AND POLICY PRIORITIES


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LETTER TO THE HONORABLE CHRIS CANNON FROM ARTHUR R. ROSEN, COUNSEL, 

COALITION FOR RATIONAL AND FAIR TAXATION


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PREPARED STATEMENT OF THE COUNCIL ON STATE TAXATION (COST)


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CRS REPORT ENTITLED ‘‘STATE CORPORATE INCOME TAXES: A DESCRIPTION AND

ANALYSIS,’’ UPDATED MAY 11, 2005, STEVEN MAGUIRE, ANALYST IN PUBLIC FINANCE, GOVERNMENT AND FINANCE DIVISION, SUBMITTED BY THE HONORABLE WILLIAM D. DELAHUNT


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LETTER TO THE HONORABLE CHRIS CANNON FROM STEVE BARTLETT, PRESIDENT AND

CEO, THE FINANCIAL SERVICES ROUNDTABLE: INDUSTRY COALITION


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LETTER TO THE HONORABLE F. JAMES SENSENBRENNER, JR.,

FROM AN INDUSTRY COALITION


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LETTER TO THE HONORABLE CHRIS CANNON, AND THE HONORABLE MELVIN WATT, 

FROM JOHN GAY, VICE PRESIDENT, GOVERNMENT RELATIONS, INTERNATIONAL

FRANCHISE ASSOCIATION (IFA)


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PREPARED STATEMENT OF DAVID J. PETTIT, PRESIDENT, AMERICAN DISTRIBUTION

CENTERS FOR THE INTERNATIONAL WAREHOUSE LOGISTICS ASSOCIATION


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LETTER TO THE HONORABLE CHRIS CANNON FROM DAN GLICKMAN, CHAIRMAN AND

CEO, MOTION PICTURE ASSOCIATION OF AMERICA


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PREPARED STATEMENT OF THE NATIONAL GOVERNORS ASSOCIATION, SUBMITTED BY

THE HONORABLE WILLIAM D. DELAHUNT


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LETTER TO THE SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW FROM

PAUL J. GESSING, DIRECTOR OF GOVERNMENT AFFAIRS, NATIONAL TAXPAYERS

UNION (NTU)


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LETTER TO THE HONORABLE MELVIN L. WATT FROM THE HONORABLE MARC

BASNIGHT, A SENATOR OF THE NORTH CAROLINA GENERAL ASSEMBLY, SUBMITTED

BY THE HONORABLE WILLIAM D. DELAHUNT


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LETTER TO THE HONORABLE MELVIN L. WATT FROM THE HONORABLE JAMES B. 

BLACK, A REPRESENTATIVE OF THE NORTH CAROLINA GENERAL ASSEMBLY, AND

SPEAKER OF THE NORTH CAROLINIA HOUSE OF REPRESENTATIVES, SUBMITTED BY

THE HONORABLE WILLIAM D. DELAHUNT


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LETTER TO THE HONORABLE MELVIN L. WATT FROM THE HONORABLE MICHAEL F. 

EASLEY, GOVERNOR, STATE OF NORTH CAROLINA, SUBMITTED BY THE HONORABLE

WILLIAM D. DELAHUNT


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LETTER TO THE HONORABLE MELVIN L. WATT FROM THE E. NORRIS TOLSON, SECRETARY, NORTH CAROLINA DEPARTMENT OF REVENUE, SUBMITTED BY THE HONORABLE WILLIAM D. DELAHUNT


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LETTER TO THE HONORABLE CHRIS CANNON FROM RICHARD J.M. POULSON, EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL & SENIOR ADVISOR TO CHAIRMAN, AND

VERNON T. TURNER, CORPORATE TAX DIRECTOR, SMITHFIELD FOODS, INC. (SMITHFIELD)


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PREPARED STATEMENT OF THE SOFTWARE FINANCE AND TAX EXECUTIVES COUNCIL

The Software Finance and Tax Executives Council (SoFTEC) is an organization 

comprised of major software companies and its mission is to provide software industry focused public policy advocacy on tax and finance issues. Taxation of interstate 

commerce is an issue in which software companies have long held a keen interest 

because their customers deploy their products in every state and most every locality. 

SoFTEC advocates policies that promote fairness, efficiency and certainty in the 

interstate taxation of software transactions. Because H.R. 1956, the subject of this 

hearing, goes to the heart of these policies, SoFTEC has been following it very closely. 

1. OVERVIEW OF THE SOFTWARE INDUSTRY AND SOFTWARE DISTRIBUTION: 

The software industry is a human capital-intensive industry. Software companies 

rely on the personnel in their research and development departments to design and 

test new products and new versions of existing products to remain competitive. Once 

the research and development team has completed a new product or a new version 

of an existing product, the marginal cost of making each successive copy approaches 

zero. There is no need to build a factory to manufacture software products. 

Computer software is a product that can be distributed using a variety of techniques. Software is available in retail stores where customers can purchase a prepackaged copy. Copies of computer software can be delivered electronically using the 

Internet or other network. Software companies can distribute their products to large 

customers by delivering a single copy of a computer program along with a license 

to make a given number of copies or a license to a make any number of copies necessary to meet the customer’s needs. Additionally, a customer might receive a single 

copy along with a license allowing it to be loaded on to a computer server that can 

be accessed by the customer’s employees from multiple locations. Last, it is not necessary to deliver to the customer a copy of the computer program at all; the software 

company might load its product onto its own server and allow customers to access 

the software’s functionality remotely. Software distribution techniques are constantly changing as technology advances. 

Some software companies enter into partnerships with other companies that specialize in the delivery of comprehensive business solutions with software as one component. For instance, one of these third-party vendors might license different software from several companies, combine the various software with computer hardware and market the package. The third-party will remit a royalty to the software 

company based on each sale. The software company may not know who the thirdparty’s customers are or where they are located. 

For a variety of legal and business reasons, software companies generally do not 

‘‘sell’’ copies of their products to their customers. Instead, they distribute copies of 

their products subject to a license agreement. Under the terms of these end user 

license agreements, the customers receive the contractual right to use the software 

while the software company retains legal title to the copy. The license agreement 

may also provide the customer with the right to make copies of the computer program for use within the customer’s business. The license agreement generally prohibits the transfer by the customer of any of the copies outside of the business and 

are prohibited from ‘‘reverse engineering’’ or ‘‘decompiling’’ the software which could 

expose trade secrets. 

As can be seen, with regard to a number of these software distribution techniques, 

the software company loses control over where the customer might use copies of its 

products. If the customer receives a license to make a certain number of copies or 

any number of copies for use anywhere in its business, the customer takes control 

over where best to use the copies. Nevertheless, the software company will retain 

an ownership interest in every one of those copies no matter where the customer 

chooses to use them. Likewise, if the software company puts its products on its own 

server and allows the customer’s employees remote access to the software’s 

functionality, the software company cares not a fig where the customer or its employees might be located when accessing the software. The same is true when the 

customer loads the software on its own server and allows its employees access to 

the software from multiple locations; the software companies does not know where 

those employees are located when they access the software, nor should they care. 

210

1See e.g., Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) (A state tax on out-ofstate businesses has been sustained against a Commerce Clause challenge ‘‘when the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does 

not discriminate against interstate commerce, and is fairly related to the services provided by 

the State.’’). 2See National Bellas Hess, Inc. v. Department of Revenue. of Ill., 386 U.S. 753 (1967), Quill 

Corp. v. North Dakota, 504 U.S. 298 (1992). 3See International Shoe Co. v. Washington, 326 U.S. 310 (1945); Northwestern States Portland 

Cement Co. v. Minnesota, 358 U.S. 450 (1959); Scripto Inc. v. Carson, 362 U.S. 207 (1960). 4See Tyler Pipe Industries Inc. v. Washington State Dep’t of Rev., 483 U.S. 232, 250 (1987). 5See J.C. Penny Nat’l Bank v. Johnson, 19 S.W.3d 831 (Tenn. Ct. App. 1999), appeal den.

(Tenn. 2000), cert. den. 531 U.S. 927, 212 S.Ct. 305 (2000); Rylander v. Bandag Licensing Corporation, 18 S.W.3d 296 (Tex. App. 2000), Motion for Rehearing Denied March 8, 2001; 9.4 Percent Manufactured Housing Service v. Department of Revenue, No. Corp. Inc. 95–162 (Ala. 

Admin. Law Div. Feb.7, 1996); MeritCare Hospital v. Commissioner of Revenue, No. C2–94–

12818, (D.C. Minn. Sept. 22, 1995). 6Geoffrey, Inc. v. South Carolina Tax Commission, 313 S.C. 15 (1993). 

2. CONSTITUTIONAL NEXUS STANDARDS FOR BUSINESS ACTIVITY TAXES: 

The law is clear that a state cannot impose a tax on an out-of-state business unless that business has a ‘‘substantial nexus’’ with the taxing state.1 The Supreme 

Court, on at least two occasions, in the context of sales and use taxes, has construed 

this ‘‘substantial nexus’’ requirement as requiring that the out-of-state business 

have ‘‘more than de minimis’’ physical presence in the taxing state.2

An older line of Supreme Court precedents holds that taxpayers acquire a substantial nexus with another state through continuous and systematic contacts with 

the state.3 The Supreme Court later added the requirement that the contacts must 

be related to the establishment and maintenance in the state of a market for the 

putative taxpayer’s products.4 However, in all of these cases, the taxpayers had an 

actual physical presence in the taxing state. In addition, all of these cases were decided prior to the Quill case, which separated the Commerce Clause analysis from 

the Due Process clause analysis and held that a physical presence was required in 

order to require out-of-state businesses to collect sales and use taxes under the 

Commerce Clause. 

Many state revenue department claim that under current law, any company ‘‘doing business within a state’’ must pay business activity taxes on income earned 

in the taxing state, even if the company has no physical presence in the state. As 

authority for this theory, they often cite two older Supreme Court cases—Shaffer 

v. Carter, 252 U.S. 37 (1920) and New York Ex Rel. Whitney v. Graves et al., 299 

U.S. 366 (1937). Even a cursory reading of these cases reveals that neither stands 

for any such proposition. 

Shaffer v. Carter involved the attempt by Oklahoma to tax income from oil and 

gas wells located in Oklahoma and owned by a Chicago resident. The Supreme 

Court held that the Due Process clause does not bar a state from imposing an annual tax on net income derived by nonresidents from property owned by them within the state. The Court’s holding centered squarely on Oklahoma’s jurisdiction over 

property within its borders and the fact that the income it was attempting to tax 

derived from such property. Those states seem to be taking language in the opinion 

about a state’s right to tax nonresidents ‘‘doing business in the state’’ out of context 

to support their claims that physical presence is not required for business activity 

tax nexus purposes. However, this case did not involve a naked claim by Oklahoma 

of the right to impose business activity taxes on companies ‘‘doing business in the 

state’’ with no physical presence. All of the income at issue in the case arose from 

the sale of oil and gas extracted from the ground in Oklahoma. 

State revenue departments likewise misconstrue the holding in New York Ex Rel. 

Whitney v. Graves. Here, Mr. Whitney, a Massachusetts resident, and his partners 

owned a seat on the New York Stock Exchange. In 1929, the exchange granted each 

of its members a ‘‘right’’ to one-fourth of a new membership. Mr. Whitney sold this 

right and New York assessed a tax on the profits from the sale. The Supreme Court 

upheld the tax and, in doing so, applied an exception to the general common law 

rule that the situs of intangible property is, for tax purposes, the owner’s domicile. 

The Court’s decision was based on the unique characteristics of seats on a stock exchange, and its holding stands for the proposition that the situs of seats on a stock 

exchange, for tax purposes, is the state in which the exchange is located. Nothing 

more can be inferred from this decision. 

On the other hand, numerous recent state level cases have construed the Quill

physical presence requirement to be applicable to business activity taxes.5 Only 

South Carolina has taken the position to date that the presence of intangible property in the state alone is sufficient to establish nexus.6 While the Supreme Court 

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has not yet ruled on whether the Quill ‘‘physical presence’’ test extends to business 

activity taxes, there are no cases in which the Court has upheld a state business 

activity tax where the out-of-state company had absolutely no physical presence in 

the taxing state. Even more importantly, there is no rational justification for the 

proposition that the Supreme Court’s ‘‘substantial nexus’’ requirement should 

equate with physical presence for sales and use tax collection purposes, but that a 

lower standard (i.e., ‘‘economic nexus’’) should apply for business activity taxes. 

Thus, a fair reading of the current state of the law, as interpreted by the state 

courts rather than state tax administrators, is that in order for a state to assert 

a claim for business activity taxes against an out-of-state business, that business 

must have some physical presence in the taxing state. Some states such as South 

Carolina and Oregon reject the existing physical presence requirement with regard 

to business activity tax nexus and are seeking to expand their right to tax out-ofstate businesses that have only an economic presence in the state. This is exactly 

why there is a critical need for the enactment of bright line standards for business 

activity tax nexus. 

3. IMPACT OF AN ‘‘ECONOMIC NEXUS’’ STANDARD ON SOFTWARE DISTRIBUTION: 

As indicated above, many state revenue departments construe their ‘‘doing busi- ness’’ tax statutes as requiring nothing more than the existence of a customer in 

their state in order to impose a business activity tax on an out-of-state business otherwise having no employees or property within their state. As indicated above, we 

believe that those states exceed their constitutional authority to project their taxing 

power outside their borders. As shown below, such a low nexus standard would 

wreck havoc on common software distribution techniques and make any attempt at 

tax compliance overly burdensome. 

Many businesses deploy software throughout their business. Large businesses 

present in many states and localities generally take delivery of computer software 

at a single location and they make copies and deploy them where needed. Alternatively, the software company could deliver multiple copies of its products leaving 

the customer free to send such copies wherever the need arises. The software company many times will have no knowledge where the customer has deployed the software. 

An economic nexus standard would give state and local revenue departments the 

ability to claim that a software company owes business activity taxes wherever the 

customer has an employee using the software. Such a standard, were it to become 

widespread, would require that software vendors build into their license agreements 

elaborate provisions requiring that the customer closely track the deployment of the 

software throughout its business and submit reports to the software company. The 

software company would then have to use those reports to figure out where it owed 

tax. On audit, the software company would bear the risk of the accuracy of its customers’ reports. An economic nexus standard would cause a software company to be 

doing business in nearly every jurisdiction where its customers are doing business. 

An economic nexus standard also would give states a reason to claim that the retention of ownership by software companies to the copies of computer programs constitutes the ownership of property sufficient to rest a claim of liability for business 

activity tax. Yet, as explained above, the software company typically has no information as to where the customer may be using the copy of the software. Making 

the software company liable for business activity tax in every jurisdiction where its 

customers may be using its software would impose an unreasonable burden on 

interstate commerce. 

4. EFFECT OF H.R. 1956 ON SOFTWARE COMPANIES: 

Section 2 of H.R. 1956 would expand the scope of Public Law 86–272. Currently, 

P.L. 86–272 provides that states cannot impose an income tax against an out of 

state company whose only activities in the taxing state consists of sending employees into the state who solicit order for sales of tangible personal property where the 

orders are sent out of state for acceptance and the goods are shipped into the state 

by common carrier. The business model contemplated by P.L 86–272 is the door-todoor salesperson common in the late 1950’s when the statute was enacted. 

P.L 86–272 only applies to companies that engage in ‘‘sales’’ of ‘‘tangible personal 

property.’’ Many states claim that P.L. 86–272 does not apply to software transactions either because software is not tangible personal property or because software is licensed and not sold. Other states skirt P.L. 86–272 by enacting taxes other 

than income taxes. 

H.R. 1956 would modernize P.L. 86–272 by eliminating its limitation to sales 

transactions; it would apply to all ‘‘transactions,’’ including license transactions. It 

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would eliminate the limitation to tangible personal property by expanding it to include all forms of property and services. Last, it would broaden P.L. 86–272 so that 

it applied to all types of business activity taxes, not just income taxes. This would 

close a major loophole that has limited the effectiveness of P.L. 86–272 in recent 

years. The amendments to P.L. 86–272 would make it more effective for software 

companies because they have large sales forces that regularly solicit orders, send 

them out of state for acceptance and fill them by shipment from out of state. 

Section 3(a) of H.R. 1956 would codify into federal law the judicially mandated 

‘‘physical presence’’ standard and would put an end to the ‘‘economic nexus’’ standard claimed by many state revenue departments. This provision is the keystone of 

the legislation. This provision would eliminate claims against software companies 

for business activity taxes based on access by employees of a customer to software 

functionality. As explained above, some software companies deliver a copy of a computer program to a customer, the customer loads the copy onto a server, and employees of the customer, wherever they might be located, can remotely access the 

software functionality. In addition, some software companies put their software onto 

their own servers and allow their customers’ employees remote access to the software. Under a physical presence standard, neither of these software business models would give rise to a taxable presence in the jurisdiction from where the software 

functionally is remotely accessed. 

We are concerned however about the provisions of Section 3(b) which puts meat 

on the bones of the term ‘‘physical presence.’’ Under Section 3(b)(3), a business 

would have a physical presence in every state in which it owned tangible personal 

property for more than 21 days. Our concern is with respect to garden-variety software transactions where the software company retains title both to the copies of the 

software that are transferred to the customer and the copies which the customer 

might make under license for internal use. We believe that Section 3(b)(3) of the 

Bill would give software companies a taxable presence in all jurisdictions where a 

copy of its software might be located. 

We believe that the Bill should be amended to make clear that retention of ownership of copies of computer software delivered to end users is not ownership of property for purposes of Section 3(b)(3) of the Bill. 

5. CONCLUSION: 

With the one exception noted immediately above, we believe that H.R. 1956, the 

Business Activity Tax Simplification Act of 2005 would go a long way towards eliminating uncertainty in with regard to where companies engaged in interstate commerce are liable for business activity taxes. We look forward to working with the 

committee as the Bill moves through the Congress.

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PREPARED STATEMENT OF CHRIS ATKINS, STAFF ATTORNEY, THE TAX FOUNDATION


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